Rural Development Plan in Vietnam

Through

The Production of Bio-diesel

STUDY REPORT

December 2004

Engineering and Consulting Firms Associations, Japan

ALMEC CORPORATION

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Table of Contents

Abbreviations List of Tables and Figures Summary Map Chapter 1 Outline of the Study 1.1 Background of the Study 1.2 Study Objectives 1.3 Geographical Area of the Study 1.4 Study Team 1.5 Itinerary of the Field Survey 1.6 Outline of Issues Identified Chapter 2 Socio-economic Features of Vietnam 2.1 Geographical Features of Vietnam 2.2 Population 2.3 Labor and Employment 2.4 Regional Economy 2.5 Poverty Incidence 2.6 Environmental Issues Chapter 3 Present Situation of the Coconut Industry in Vietnam 3.1 Coconut Production in General 3.2 Coconut Planting Areas and Output 3.3 Coconut Processing 3.4 Coconut Research and Development 3.5 Institutional Set-up for the Coconut Industry Chapter 4 The Development of Systems for the Use of Bio-diesel in Vietnam 4.1 Bio-diesel Production and Processing 4.2 Commercialization of Bio-diesel Production 4.3 Outline of the Project 4.4 Examination of the Pricing Structure of Bio-diesel 4.5 Assessment of Farmer’s Income 4.6 Application of CDM and Emission Trade Chapter 5 Development Plan 5.1 Development Timeframe 5.2 Funding Program 5.3 Model Coconut Industrial Zone Technical Papers Paper 1：Overview of Agriculture and Rural Development

1.1 Agriculture-Forestry-Fishery Sector 1.2 Industrial Crops

Paper 2：Perspectives on Bio-diesel Production around the World

2.1 Alternative Fuel Use around the World 2.2 Potential for Bio-fuel Production in Vietnam 2.3 Emerging Markets for Bio-fuel

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2.4 Japanese Experience in Bio-fuel Production Paper 3：Japanese Experience of Rural Industrial Development

3.1 General 3.2 Starch Industry 3.3 Applicability of the Japanese Experience to Vietnam

Appendices: Appendix-1 Itinerary of the Field Survey Appendix-2 List of Institutions and Attendants Appendix-3 Technical Report on CME Blended Diesel Appendix-4 Emission Trade Appendix-5 Kyoto Protocol Appendix-6 Coconut Planting Area and Output by Province Appendix-7 Terms of Reference for the Consulting Services “The Study on Strategic Policy Formulation for the Rural Industrialization through the Use and Production of Bio-diesel”

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Abbreviations AAGR Average Annual Growth Rate AFFS Agriculture-Forestry-Fishery Sector ASEAN Association of South East Asian Nations BDF Bio-diesel Blended Fuel BPP Bio-diesel Production Plant CDM Clean Development Mechanism CFEZ Central Focal Economic Zone CIZ Coconut Industrial Zone CME Coconut Methyl Ester CNO Coconut Crude Oil COP3 3rd Conference of the Parties DARD Department of Agriculture and Rural Development DOST Department of Science and Technology DNA Designated National Authority DOI Department of Agriculture and Rural Development DPF Diesel Particulate Filter DPI Department of Planning and Investment EU European Union FDI Foreign Direct Investment FEZ Focal Economic Zone FIRR Financial Internal Rate of Return GASOHOL Ethanol Blended Gasoline GDP Gross Domestic Product GSO General Statistics Office GHGs Greenhouse Gases ICPP Integrated Coconut Processing Plant IPC Investment Promotion Center KL Kilo-liter MOI Ministry of Industry MOLISA Ministry of Labor, Invalids, and Social Affairs MOPS Means of Platts Singapore MARD Ministry of Agriculture and Rural Development NFEZ Northern Focal Economic Zone OE Operation Entity PC Peoples Committee PM Particulate Matter RBD Refined Bleached Deodorized Oil SFEZ Southern Focal Economic Zone SOE State Owned Enterprise TMG Tokyo Metropolitan Government UNFCCC United Nations Framework Convention of Climatic Change VND Vietnam Dong

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List of Tables Table 1.1 Changes of GDP and FDI Table 1.2 Economic Disparities among Regions (2003) Table 1.3 Projection of Annual Fuel Consumption by Transport Sector Table 2.1 Population Distribution by Region Table 2.2 Employment Situation (1996–2003) Table 2.3 Distribution of Employment by Economic Sector Table 2.4 Average Monthly Income per Capita by Region Table 2.5 Gross Domestic Product by Economic Sector Table 2.6 Key Statistics for Vietnam by Region in 2003 Table 2.7 Regional Poverty Rates (below the National Poverty Line) Table 3.1 Production of Vegetable Oils Table 3.2 Estimated Production Volumes of Coconut Products Table 4.1 Planned Bio-diesel Production Scheme Table 4.2 Assessment of the Real Market Price of Diesel Table 4.3 Probable Market Price of Coco-diesel (100%) Table 4.4 Facility and Initial Capital Requirement Table 4.5 Coconut Components and Conversion Factors Table 4.6 Price of Products and Farmer’s Income Table 4.7 Price of Products and Farmer’s Income under CDM Table 5.1 Profile of the Proposed Project in Binh Dinh Province List of Figures Figure 1.1 Location of the Southern Central Coastal Region Figure 4.1 Conceptual Arrangement of a Bio-diesel Production Zone (40,000 ha.) Figure 5.1 Indicative Development Timeframe

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Summary

1. Background of the Project

The economic development of Vietnam has made remarkable progress in recent years with an annual

GDP growth rate consistently over 7.0% and this is expected to accelerate further in the future. However,

the Government of Vietnam has started addressing several strategic development issues aiming at the

realization of sustainable as well as equitable economic development throughout the country. The key

issues addressed by this Study, from among the current issues being addressed by the Government of

Vietnam, are as follows:

l Narrowing the ec onomic disparity between regions;

l Narrowing the economic gap between urban and rural areas;

l Generation of employment and income opportunities in rural areas;

l Alleviation of poverty, especially in rural areas; and

l Improvement of air quality degraded by the increased volume of automobile gas emissions

(especially of diesel fuel).

One of the measures proposed to address these issues is the development of bio-fuel (biomass energy) in

rural areas, since the raw materials needed for bio-fuel production are mostly found growing in these

areas and much land is available in Vietnam for further expansion of their cultivation. It is thought that

bio-fuel production in Vietnam will create the foundation for rural industrialization, thereby creating

employment and income generation opportunities which will help alleviate poverty. The Study aims to

assess the potential for the production of bio-diesel made from coconut and to formulate a rural

development plan involving the use and production of Bio-diesel at a conceptual level, based on a

consensus among those agencies involved.

2. Bio-fuel Uses and World Production

In Europe, the consumption of bio-fuel has increased significantly over the past 10 years. The total

consumption of bio-diesel in the EU reached almost 2.0 million KL per year in 2003, although it was

almost nil till around 10 years ago. In 2003, the EU issued a directive to use bio-fuel and blend it with

petroleum fuel at a minimum of 5.75% by the end of 20101. In Germany alone, the consumption of

bio-diesel blended with petroleum diesel fuel (BDF)2 reached around 850,000 KL in 2003. France

(380,000 KL) and Italy (350,000 KL) have followed the German lead. The raw materials used to

produce bio-diesel in the EU are rapeseed and sunflower oil.

1 Directive on the promotion of the use of bio-fuels or other renewable fuels for transport in the EU, 17th May 2003 2 Bio-diesel is the name for a variety of ester-based fuels (fatty esters) generally defined as monoalkyl esters made from vegetable oils such as canola, coconut, palm, soybean oil, hemp oil or sometimes even from animal fats through a simple trans-Esterification process. Bio-diesel is as efficient as diesel in powering unmodified engines.

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In Asia, the use and development of bio-fuel has just started in countries such as the Philippines,

Thailand and Malaysia, although its volume of consumption is still quite limited. However, the potential

demand of the Asian region is enormous and it will be larger than that of the EU once Japan, China and

Korea are included. The major raw materials for the production of bio-diesel in Asia are coconut and

palm oil since Asia is the leading region for the production of these two crops, worldwide.

3. Degradation of Air Quality in Urban Areas

In parallel with the rapid economic development of Vietnam, the consumption of energy has been

increasing noticeably, especially in the transport sector. As the number of registered vehicles increases

the consumption of automotive fuel has increased from around 3.0 million KL per year in 1995 to 6.0

million KL in 2003 at an average annual growth rate of more than 10%, which surpasses that of GDP.

The degradation of air quality in urban areas where passenger and freight traffic is concentrated is now

posing an environmental problem, caused mainly by increased automobile exhaust gas emissions.

The major automotive gas emissions, especially from diesel driven vehicles, causing a degradation in air

quality are Particulate Matter (PM)3, NOx, SO2, HC and CO. The PM in the air also directly affects

human health since PM is considered to be the cause of respiratory system disorders such as asthma and

lung cancer. The fuel combustion efficiency of diesel is not as good as that of gasoline. Thus, the air

quality degradation in cities is caused mostly by diesel gas emissions. Since bio-diesel made from

coconut significantly reduces the PM level in diesel gas emissions without requiring any modification to

existing engines, coconut-based bio-diesel is recommended as an alternative. This is one of the reasons

why the Study focuses on the use and production of bio-diesel made from coconut.

4. The Use and Production of Bio-fuel As a Means to Tackle These Issues

The objectives of introducing bio-fuel in Vietnam are to:

l Create new markets and industries for coconut in order to stimulate the economy in rural areas;

l Generate employment opportunities in rural areas, especially in the Central Region;

l Increase and stabilize the agricultural output, particularly that of coconut;

l Increase the farmer’s income in rural areas in order to alleviate poverty;

l Narrow economic disparities between rural and urban areas;

l Narrow economic disparities between regions;

l Reduce emissions of Greenhouse Gases (GHGs), especially carbon dioxide (CO2); and

l Reduce the amount of harmful substances in diesel gas emissions, particularly Particulate Matter

(PM)

3 The size of Particulate Matter which causes respiratory disorders, including lung cancer, is less than 2.5 microns. The size of soot emitted from the tail pipes of diesel engine exhausts is more than 10 microns. Since 2003, the Tokyo Metropolitan Government has strictly regulated the emission level of PM, requiring all vehicles to be equipped with a Diesel Particulate Filter (DPF), by municipal law.

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The raw materials that have been identified as being suitable for the production of bio-diesel are

vegetable oils made from coconut, palm, rapeseed, sunflower, soybean, corn and waste frying oil. Of

these, coconut is thought to be the most appropriate raw material for the production of bio-diesel

because of the following reasons:

1. Coconut cultivation has a long history in Vietnam (going back 200 to 300 years);

2. Climatic conditions, geography and soil types in Vietnam are suitable for the growing of coconut

(The area below latitude 20o North is suitable for the cultivation of a range of tropical cash crops,

including coconut, and coconuts can be planted along the coastline even in soils of high salinity);

3. A large number of farmers (more than 7 million) are already engaged in coconut cultivation;

4. Farmers cultivating coconut face difficulties in obtaining an adequate income due to a downward

trend in price. (The average annual income from coconut cultivation is less than US$200.00 or

VND 3 million, per farmer);

5. Most of the farmers cultivating coconut are considered to be living below the poverty line and need

assistance to remedy this situation. (Any average annual income below US$360.00 or VND 5.6

million is considered to be below the poverty threshold);

6. A considerable area of waste land (more than 600,000 ha) is suitable for coconut cultivation,

especially along the Southern Central Coastal Region;

7. Coconut is the best material from which to produce the highest quality bio-diesel;

8. The potential to establish new industries in rural areas where coconut is grown is high; and

9. No palm cultivation has taken place in Vietnam;

5. Geographical Area of the Project

The Study area is limited to the Southern Central Coastal Region, especially those provinces situated

along the coast where the potential for future expansion of coconut cultivation is greatest. The provinces

situated along the southern coast of the Central Region are collectively referred to as the Southern

Central Coastal Region. This region comprises Da Nang, Quang Nam, Quang Ngai, Binh Dinh, Phu Yen

and Khanh Hoa provinces. Although not included in this area, some provinces such as Thua Thien-Hue

(North Central Region); Ninh Thuan and Binh Thuan (North East South Region), along the coastline,

can also be considered part of the coconut-growing zone.

The reasons why this South Central Coast Region has been selected for the project are as follows:

1. The Central Region, especially the South Central Coastal Region, currently grows 32,000 ha of

coconut and is suitable for coconut cultivation; and there is great potential to expand coconut

cultivation to over 400,000 ha.

2. The Central Region, in general, lags subs tantially behind the other two economic regions of North

and South Vietnam. Narrowing the economic gap between regions is one of the Government’s

directives.

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3. The creation of job opportunities through rural industrialization is imperative in this region.

4. The Central Region has several commercial ports suitable for the transportation and distribution of

products throughout the country by means of domestic shipping, which ensures minimal transport

costs in getting products to the markets.

6. Bio-fuel as a Stimulator of Rural Economic Development in Vietnam

Bio-fuels made from various plants or vegetables can be used as an alternative to fossil fuel

(hydrocarbon petroleum fuel) in both power generation and internal combustion engines. The feasibility

of production and use of bio-fuel as part of a national strategy depends on various factors such as:

1. availability of raw materials;

2. a sustainable and steady supply of raw materials;

3. availability of appropriate and affordable processing technology;

4. the constant purchase of bio-fuel;

5. a proper distribution system; and

6. acceptance of the price of the bio-fuel by its users.

The present situation in Vietnam with regard to these conditions is as follows:

Availability of Raw Material: In Vietnam, the coconut has been traditionally cultivated in the Mekong

Delta Area for several hundred years and, beginning in the 1980s, coconut planting was extended along

the coast of the Central Region. The total area planted has now reached approximately 160,000 ha,

nationwide. Therefore, the raw material for the initial production of bio-diesel fuel is thought to already

be readily available in Vietnam and easily able to be expanded, especially along the coast of the

Southern Central Coastal Region, in order to meet any future increase in demand. Other possible raw

materials for the production of bio-fuel have been identified, such as sugarcane for the production of

Ethanol, but these do not exist in significant volumes.

Sustainable and Steady Supply of Raw Material: In Vietnam, the total area planted in coconut is

approximately 161,000 ha, which produced 884,000 t of nuts in 2003. The areas cultivated in the three

main growing regions are shown in Table 1. The price of coconut products has been declining and the

area cultivated has been decreasing, especially in the South Central Coast Area, because of the

shrinkage of both the domestic and international markets. A large number of coconut growers have been

looking for a new market for their products. Because of this, a contract cultivation system which ensures

a stable and constant supply of coconut as a raw material at a fixed price, under an appropriate pricing

mechanism, is likely to be acceptable to the coconut growers, bio-diesel producers and large-scale

purchasers of bio-diesel.

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Table 1 Present Coconut Planting Areas and Outputs

Units: Areas are given in hectares, outputs in 1000 t of shell weight Cultivated Area (ha) Output

(Weight of nuts, t) Remarks

Whole Country 161,200 884,800 Total North Region 3,200 34,000 Red River Delta Area and others Central Region 32,500 187,500 South Central Area and others South Region 125,500 663,300 Mekong Delta Area Note: See Appendix-5 in details

Availability of Appropriate and Affordable Processing Technology: Current technology used for

coconut oil processing is obsolete and outdated. A joint venture has been operating in the Mekong Delta

Area but its production volume is quite limited. However, further new and modern processing

technology can be introduced by setting up joint-venture companies with a foreign entity.

Constant Purchase of Bio-fuel: Diesel fuel consumption of Vietnam is projected to be 5.4 million KL

per year by 2010. Assuming the initial target-blending ratio for bio-diesel is 2%, then the annual

consumption of bio-diesel is estimated at 100,000 KL, which requires 157,000 ha of coconut cultivation.

If the blending ratio is targeted at 5% then the estimated bio-diesel consumption is 270,000 KL, which

requires 390,000 ha of coconut cultivation, exclusively used for the production of bio-diesel.

Proper Distribution System: The bio-diesel produced by the Project will initially be available for

purchase in an organized way by various public bus companies in the major cities as well as by

domestic shipping companies, including those operating on inland waterways.

Acceptance of Bio-diesel Price by the Users: In order to maximize the benefits to coconut growers

who mostly belong to the low-income segment of the population, the bio-diesel market price should be

set as high as possible, without exceeding the actual pump price of diesel fuel which is subsidized by

the Government. In order to minimize the cost of production, the CDM mechanism can be applied and

utilized. The financial feasibility of a bio-diesel production project with a production capacity of 100 t

per day is analyzed, below, based on the assumption that the market price of the bio-diesel produced is

VND 5,600 (the actual price without subsidy) and that the Project will probably be approved as a CDM

project. The number of bio-diesel production plants required (each having a production capacity of 100 t

per day) is estimated at three (3) units when the target-blending ratio is set at 2% and eight (8) units

when set at 5%. Table 2 shows the results of this preliminary financial feasibility analysis.

Table 2 Financial Feasibility Indicators

Case With Emission Trade Without Emission Trade of CO2 Sequestration

Without Emission Trade

FIRR 8.0% 4.8% 1.2% Source: Study Team

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Note: ET means the revenue obtained through emission trading. Two types of emission trade are considered: one based on the volume of CO2 reduced by partly replacing petroleum diesel with bio-diesel, and the other based on the volume of CO2 absorbed by coconut trees newly planted to meet expanded bio-diesel demand.

7. Direction of Agro-industrial Development

Tea, coffee, cashew, pepper and rubber are the traditional export cash crops not usually regarded as

suitable products with which to generate additional value. It may be necessary to review the status of

coconut, which has not been regarded as a key crop for export and industrialization up till now. Since all

parts of the coconut tree can be used for various useful purposes, such as the leaf and stem for building

houses and coconut itself for drinking, cooking and washing, the coconut has been called the “Tree of

Life”. Thanks to recent technological advances, the coconut is now considered the best material from

which to produce bio-diesel fuel, for which a large, stable and valuable domestic market exists in the

form of automobile and internal combustion engines. The future direction of rural industrial

development based on agricultural products should therefore include the production of bio-diesel fuel

made from coconut as well as other associated products made from coconut shell (activated charcoal),

husk (geo-textile materials) and oleo-chemical products (soap, detergent, industrial alcohol, etc.). The

coconut should therefore be recognized by the authorities concerned as a key crop for industrialization.

8. Increased Concern over Carbon Dioxide Emissions

The reduction of carbon dioxide emissions can be realized by using bio-fuel, produced from plants, as

an alternative to diesel fuel. Therefore, the production of bio-diesel can be approved as a CDM project

in accordance with the stipulations of the Kyoto Protocol under which the project is then entitled to

conduct emission trading. It should be noted that the CDM will become effective from February 2005.

9. Necessity for Government Intervention

The fuel distributed and sold at service stations is subsidized by the Government so as to avoid acute

fluctuations in price. Countries like Vietnam that have no strategic stockpiles of crude oil or petroleum

products and where the private sector’s role in trading and distributing petroleum products is limited

need substantial government support to keep the fuel price in the market as stable as possible. Therefore,

since the price of diesel is controlled by the government and since the marketing and distribution system

for bio-diesel is the same or similar to that of petroleum diesel, government intervention and price

support is needed here as well. As well as setting the price of bio-diesel in the market, government

intervention is necessary to help successfully establish a bio-diesel production and distribution system

in Vietnam.

1. Policy formulation on the use and production of bio-fuel;

2. Establishment of guidelines for production and distribution of bio-fuel;

3. Establishment of technical standards;

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4. Establishment of quality control and inspection systems;

5. Subsidy to promote the use of bio-fuel;

6. Research and development on bio-fuel and bio-engineering applications;

7. Establishment of an institutional financing system for the development of production facilities; and

8. Application of a Clean Development Mechanism

10. Model Configuration for Bio-diesel Production

If the blending ratio of bio-diesel with diesel fuel is assumed to be 5% of the annual diesel demand, then

the annual consumption of bio-diesel is projected to be 268,000 KL in 2010. To meet this demand, eight

(8) units of bio-diesel production plant (BDP), each having the capacity to produce 100 t of bio-diesel

per day, are required. One coconut industrial zone (CIZ) composed of one (1) BDP as a core facility

with 50,000 ha of coconut cultivation area exclusively designated for bio-diesel production and five (5)

units of the integrated coconut processing plant (ICPP), whose core facility is a coconut oil mill with a

capacity of 30 t per day, is planned as a model configuration for future production facilities. To meet the

total demand, it will be necessary to develop eight (8) such CIZs.

11. Facilities and Initial Capital Requirement

The targeted production volume of bio-diesel is 268,000 KL per year or 740 KL per day, assuming the

target-blending ratio is 5%. Therefore eight (8) CIZs are needed to meet future demand. The number

and scale of facilities required and the amount of initial capital investment is shown in Table 3 below.

Table 3 Facilities and Initial Capital Requirement

Item Unit Zone 8 Zones in Total

Unit Cost (US$ Million)

Amount (US$ Million)

Existing Coconut Area ha 160,000 Coconut Area Needed ha 50,000 393,000 Development Area ha 230,000 0.001 230 Integrated Coconut Plant*1 Unit 5 40 5.000 200 Bio-diesel Plant*2 Unit 1 8 18.000 144 Loading Facility (Port)*3 Unit 1 8 2.000 16 Total (US$ Million) 590 Total (VND Trillion) 9,200 Source: Study Team 1) Copra is collected from the surrounding coconut cultivation area and processed into CNO at the ICPP.

The coconut shell is processed into activated charcoal; the husk is processed into geo-textiles, etc. and part of the CNO is processed into soap, detergent and/or industrial alcohol, etc.

2) Each province has a commercial port which can accommodate 3,000–5,000 DWT tankers.

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12. Nationwide CIZ Development Program 1) Model CIZ Development Plan

The use and production of bio-fuel made from coconut or other plants is quite a new idea and there will

need to be some experimentation with the technology involved. It is, therefore, proposed to carry out

initial model CIZ development on a small scale in which the core production facility is a bio-diesel

production plant with a production capacity of only 3 to 10 t per day. In this model development, not

only the production of bio-diesel but also the methods for expanding the coconut cultivation area,

collection of the copra, production of CNO and other associated industrial products will all be trailed on

an experimental basis. Through these experimental activities, the necessary local and central

government administration will also be organized and set in place. As of December 2004, the proposed

location for the model CIZ is in Binh Dinh Province in the center of the South Central Coast Region and

with a good commercial port nearby at Quy Nhon.

2) Overall Development Timeframe

The proposed development timeframe is 7 years (2005–2011). The proposed target production volume

is 100 t per day, minimum, but this can be raised to 300 t if the necessary finance sources can be secured.

This will make 2% blending possible by 2010, in keeping with the stated project objectives. Figure-1

illustrates the tentative development timetable.

Figure 1 Indicative Development Timeframe

Project Year 1 2 3 4 5 6 7 Calendar Year 2005 2006 2007 2008 2009 2010 2011

Administrative Area 1 Consensus Building 2 Policy Frame Work 3 Development M/P*1 4 Formulation of Regulations*2 Model CIZ Development (3-10 t)*3 1 Feasibility Study 2 Model Plant Design 3 Construction of Plant 4 Experimental Production CIZ Development (100 tpd x 3) 1 Financial Arrangements 2 Organizing System 3 Design of Facility 4 Construction of Facility 5 Production and Distribution Coconut Area Development (100,000 ha)

Source: Study Team Note:

1) M/P means the program development master plan. 2) Formulation of regulations includes technical standards, handling guidelines, etc. 3) Model plant’s capacity is tentatively planned to be 3–10 t per day. 4) It depends on the development master plan but if the production capacity is 300 t per day it will be

possible to use a blending ratio of 2%.

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3) Possible Sources of Technical and Financial Assistance

The development schedule can be divided into three (3) phases. The technical and financial cooperation

required at each stage of the Project is assessed as follows:

1. Experimental Phase: Any available supporting mechanism from Japan for the development of

biomass energy development and the establishment of the model plant or model CIZ will be

considered.

2. Development Program Formulation Phase: For the preparation and formulation of a development

strategy and program for the use and production of bio-diesel, a technical collaboration program

with the Japan International Cooperation Agency (JICA) will be considered.

3. Execution Phase: The core project for the initial CIZ and the project, as a whole, will apply for

CDM approval and the Japan Bank for International Cooperation (JBI C) will be approached for a

project loan for the infrastructure needed.

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Map of the Southern Central Coastal Region

Note: The area shown in purple is the South Central Coast Area where the Project is planned.

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Chapter 1

Outline of the Study

1.1 Background of the Study

1) General

The economy of Vietnam has been developing rapidly and its speed of development is likely to

accelerate further in the future. However, the Government of Vietnam has started to address several

strategic development issues aiming at the realization of sustainable as well as equitable economic

development throughout the country. The key issues addressed by this Study, from among the issues

currently being addressed by the Government of Vietnam, are as follows:

l Narrowing the economic disparity between regions;

l Narrowing the economic gap between urban and rural areas;

l Generation of employment and income opportunities in rural areas;

l Alleviation of poverty, especially in rural areas; and

l Improvement of deteriorating air quality due to the increased volume of automobile gas emissions

(especially of diesel fuel).

One of the measures proposed to address these issues is the development of bio-fuel (biomass energy) in

rural areas, since the raw materials needed for bio-fuel are mostly grown in these rural areas and much

land is available in Vietnam for further expansion. It is thought that bio-fuel production in Vietnam will

create the foundation for rural industrialization thereby creating employment and income generation

opportunities which will help alleviate poverty. The use of bio-fuel is also expected to benefit the

environment by helping clean the air degraded by automobile gas emissions and contribute to the

prevention of global climate change by effectively reducing carbon dioxide emissions. The Study aims

to assess the potential to produce bio-diesel from coconut (Coconut Methyl Ester – CME)4 and to

formulate a rural development plan involving the use and production of Bio-diesel at a conceptual level,

based on consensus among those agencies concerned.

2) Bio-fuel as an Alternative Energy Source and Stimulator of Rural Economic Development

Bio-fuel made from various plants or vegetables can be used as an alternative to fossil fuel

(hydrocarbon petroleum fuel) for power generation and internal combustion engines used for transport.

The feasibility of the use and production of bio-fuel as part of a national strategy depends on various

factors such as (1) availability of raw materials, (2) a sustainable and steady supply of raw materials, (3)

4 Coconut Methyl Ester – CME is produced from Refined Bleached Deodorized (RBD) coconut oil and is similar to diesel fuel.

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availability of appropriate and affordable processing technology, (4) availability of planting areas for

raw materials, (5) constant purchase of bio-fuel, (6) a proper distribution system; and (7) acceptance of

the price of bio-fuel by the users.

3) Available Materials for Bio-fuel Production in Vietnam

The major raw materials used to produce bio-fuel for automobile or internal combustion engines can be

briefly divided into two categories: one to alter gasoline and the other to alter diesel. The former is

categorized as Ethanol based fuel produced from sugarcane, soy beans, etc. and the later as Methyl Ester

based fuel produced from vegetable oils such as coconut oil, palm oil, rapeseed oil, sunflower oil,

peanut oil or animal fat. These products are referred to as Fatty Acid Methyl Esters.

In Vietnam, the coconut has been traditionally cultivated in the Mekong Delta Area for several hundred

years and, since the 1980s, coconut planting has also been extended along the coast of the Central

Region. According to the statistics of the Oil Plant Institute (OPI), the total area planted has now

reached approximately 250,000 ha, nationwide. However, other data show the estimated cultivated area

planted in coconut at only 160,000 ha. In this Study, the es timated area of coconut plantings is assumed

to be 160,000 ha. Therefore, the raw material for the initial production of bio-diesel fuel is assumed to

be readily available in Vietnam and capable of expansion to meet with any increased demand in the

future, especially along the coast of the Southern Central Coastal Region. In this Study, we focus on the

use and production of bio-fuel made from coconut (bio-diesel) and assess its future potential.

4) Bio-fuel Use and World Production

In Europe, the consumption of bio-fuel has been expanding significantly. The total consumption of

bio-fuel in the EU reached almost 2.0 million KL per year in 2003, although it was nil around 10 years

ago. In 2003, the EU issued a directive to use and blend bio-fuel with petroleum fuel at a minimum of

5.75% by the end of 20105. In Germany, alone, the consumption of bio-diesel blended with petroleum

diesel fuel (BDF)6 reached around 850,000 KL in 2003. The raw materials used to produce bio-diesel in

the EU are rapeseed and sunflower oil. France (380,000 KL) and Italy (350,000 KL) have followed

Germany’s lead.

In Asia, the Government of the Philippines has already directed all government owned or operated

diesel driven vehicles to use a 1% blend of BDF with diesel fuel from April 2004. In the case of the

Philippines, the raw material used for the production of bio-diesel is coconut oil. The Government of the

Philippines has been formulating a bio-diesel promotion strategy which will, in the future, blend

coconut-based bio-diesel (coco-diesel) with all petroleum diesel fuel at a ratio of 5%.

5 Directive on the promotion of the use of bio-fuels or other renewable fuels for transport in the EU, 17th May 2003 6 Bio-diesel is the name for a variety of ester-based fuels (fatty esters) generally defined as monoalkyl esters made from vegetable oils such as canola, coconut, palm, soybean oil, hemp oil or sometimes even from animal fats through a simple trans-Esterification process. Bio-diesel is as efficient as diesel in powering unmodified engines.

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The Government of Thailand started the distribution of Ethanol made from sugarcane blended with

gasoline in June 2004. It has targeted Ethanol to be blended with gasoline at 10% (E10) by the year

2011. Experiments into the use of bio-diesel made from palm oil were carried out around 10 years ago

and this fuel is likely to be introduced for practical use, although in limited volumes, from 2005 on. The

use of bio-diesel has been established and its target for blending with petroleum fuel has been set at 3%

(B3) by 2011. As the price of crude oil increases the consumption of bio-fuel may be accelerated,

subject to the market price and the sustainable supply of bio-fuel products.

1.2 Study Objectives

The objectives of the Study are to assess the potential to enhance rural industrialization through the use

and production of bio-diesel made from coconut, especially in the Southern Coastal Central Region of

Vietnam, and to prepare a conceptual proposal embodying the creation of a bio-fuel production and

distribution system. It is envisaged that the conceptual project design will then be discussed with the

possible project stakeholders identified through the course of the Study in order to further advance the

proposed Program.

1.3 Geographical Area of the Study

The geographical area encompassed by the Study includes the whole area where coconut cultivation has

taken place in Vietnam, particularly the Southern Central Region and its coastal provinces where most

future expansion may occur. The provinces situated along the southern coast of the Central Region can

be collectively referred to as the Southern Central Coastal Region. This region is composed of the

provinces of Da Nang, Quang Nam, Quang Ngai, Binh Dinh, Phu Yen and Khanh Hoa. Although not

included in this area, some coastal provinces such as Thua Thien-Hue (North Central Region), Ninh

Thuan and Binh Thuan (North East South Region) could also be considered as part of the

coconut-growing zone. Figure 1.1 illustrates the location of the Southern Central Coastal Region.

1.4 Study Team

Name Firm Position Isamu KOIKE Almec Corporation Senior Consultant Trinh Ngoc Vinh Almec Corporation Local Consultant

18

1.5 Period of the Study

The Study has been conducted since August 2004 and completed in December 2004. The itinerary of the

field survey and organizations contacted for interview is as shown in Appendix-1.

1.6 Outline of Issues Identified

The key issues addressed by the Study Team, from amongst the issues addressed by the Government of

Vietnam for strategic economic development, are as follows:

l Narrowing the economic disparity between regions;

l Narrowing the economic gap between urban and rural areas;

l Generation of employment and income opportunities in rural areas;

l Alleviation of poverty, especially in rural areas; and

l Improvement of deteriorating air quality due to the increased volume of automobile gas emissions

(especially of diesel fuel).

1) Narrowing the Economic Disparity Among Regions

In 1986, Vietnam began its transition from a centralized planned economy towards a market-oriented

economy. Since then, its economic performance has been remarkable. Vietnam’s economy is now

enjoying a steady increase in GDP with a high rate of growth, averaging 7.0% over the past ten years,

coupled with a high rate of growth in the retail sector as consumers spend their ever increasing

disposable income.

The government has reaffirmed its commitment to economic reform and economic plans look towards

investment as a means of economic development. Investment is playing a significant role in what is now

one of the most impressive economies in Asia. The country is currently receiving huge amounts of

foreign investment and even more, proportionately, than China. Fueled by investments and a developing

export sector, Vietnam’s GDP growth is now second only to China in the region.

In spite of the 1997 Asian financial crisis and the subsequent stagnation of the global and regional

economy, Vietnam posted a steady growth rate of more than 7.0% per annum. The engine of Vietnam’s

economic growth is its ever-expanding investments. From 1995 to 1998, the share of foreign direct

investment increased at 20 to 30% per annum. However, after 1999, FDI’s share declined to 17.5% by

2003. Despite the declining share of FDI in total investment, investment by the state and non-state

sector has gradually increased from 69.3% in 1995 to 82.5% in 2003 and this trend is likely to continue

in the future. Thus, the economic growth of Vietnam will become more stable than in the past. Table 1.1

shows the changes in GDP and the share of investment in GDP.

19

Given the improvements in the business environment and a recovery of external demand, especially

from the Asian region, GDP growth is projected to remain above 7% in 2004 and from 2005 onward.

Growth will be underpinned by strong domestic demand, which will increase by 8–10 % in coming

years, and by an increase in annual export growth of 12% over the same period.

Table 1.1 Changes of GDP and FDI

Unit: VND billion (at constant 1994 prices) GDP Investment FDI A B C

Year Amount Change Amount B/A Amount Change C/B 1995 195,567 64,684 33.0% 19,643 30.3% 1996 213,833 9.34 74,315 34.7% 19,303 -1.7 26.0% 1997 231,264 8.15 88,607 38.3% 24,774 28.3 28.0% 1998 244,596 5.76 90,952 37.2% 18,868 -23.6 20.7% 1999 256,272 4.77 99,854 38.9% 17,258 -8.5 17.3% 2000 273,666 6.79 110,636 40.4% 20,685 19.7 18.7% 2001 292,535 6.89 124,143 42.2% 22,778 10.1 18.4% 2002 313,247 7.08 143,600 45.8% 25,846 13.5 18.0% 2003 335,989 7.26 158,606 47.2% 27,833 7.7 17.5%

Source: Statistical Yearbook 2003 A major part of FDI has been into the core cities of Vietnam, or the so called Focal Economic Zones, of

which the major centers of economic development have been those major urban cities such as Hanoi in

the north and Ho Chi Minh City in the south. The concentration of investment into such core cities or

zones has been an economic development strategy of the Government of Vietnam and has led to rapid

economic development in a very effective manner.

Three Focal Economic Zones were designated in this economic development strategy, namely the

Northern Focal Economic Zone (NFEZ), the Central Focal Economic Zone (CFEZ) and the Southern

Focal Economic Zone (SFEZ), of which the core cities are Hanoi, Da Nang and Ho Chi Minh City,

respectively. The profiles of these FEZs are summarized in Table 1.2.

Table 1.2 Economic Disparities among Regions (2002)

Unit NFEZ CFEZ SFEZ National

Population ‘000 8,193 4,357 8,825 77,635 GDP US$ Million 2,668 727 6,373 19,536 Agriculture Share in % 14 28 6 30 Industry Share in % 37 29 55 34 Service Share in % 49 43 39 36 GDP per Capita US$ 326 167 722 252 Poverty Incidence

Share in % 4.9 20.2 6.8 10.6

Urbanization Share in % 37 29 64 Source: GSO 2003

20

As shown in this table, the economic disparity between FEZs is evident. It clearly shows that the SFEZ

leads in national economic development with the NFEZ following in second place but with the CFEZ

lagging behind these other two FEZs. How this regional economic disparity is to be rectified and how

best to accelerate the CFEZ’s economy have been important issues of national economic development.

In order to narrow the gap between the Central Region and other regions, a fairly large-scale

industrialization project is to be carried out in the Central Region. Although an attempt to establish the

first petroleum refinery in Vietnam in the Central Region has been suspended, this will be realized in

coming years, in which case the CFEZ’s base industry might well be built around fuel processing or

chemicals. In view of this expected change of economic structure in the Central Region, the

establishment of bio-diesel production plants and coconut processing industries are also to be

recommended.

2) Improvement of Air Quality in Urban Areas

In parallel with rapid economic development, the consumption of energy by the transport sector has

been increasing noticeably. As the number of registered vehicles increases the consumption of

automotive fuel increased from around 3.0 million KL per year in 1995 to 6.0 million KL in 2003, at an

average annual growth rate of more than 10%, surpassing that of GDP. The air quality in urban areas

where passenger and freight traffic is concentrated now poses an environmental problem caused by the

degradation of air quality mainly due to increased automobile exhaust gas emissions. The annual

volume of fuel consumption by the transport sector is projected to be 5.36 million KL in 2010 and 8.54

million KL in 2020, as shown in Table 1.3.

Table 1.3 Projection of Annual Fuel Consumption, by Transport Sector

Unit: Million t

2000 2010 2015 2020 Fuel in Total Gasoline 1.48 3.49 4.57 5.56 Diesel 3.79 8.94 11.71 14.24 Total 5.27 12.43 16.29 19.80 Fuel for Transport Gasoline 1.48 3.49 4.57 5.56 Diesel 2.27 5.36 7.03 8.54 Total 3.75 8.85 11.60 14.10 Source: MOI

This means that by 2010 the volume of emissions from diesel driven vehicles in the cities will be twice

that at present. Unless measures are taken to curb the air quality degradation caused by increased traffic

volumes, this public hazard may seriously affect life in the major cities of Vietnam.

The major substances in automobile gas emissions causing degradation of air quality are Particulate

21

Matter (PM)7, NOx, SOx, HC and CO. PM in the air also directly affects human life since it is

considered a cause of respiratory system disorders such as asthma and lung cancer. The efficiency of

diesel fuel combustion is not as good as that of gasoline. Thus, the air quality degradation in cities is

caused mostly by diesel gas emissions. Since bio-diesel made from coconut can significantly reduce PM

levels in diesel gas emissions, the use of coconut-based bio-diesel is to be recommended. (Refer to

Appendix-5; the test results of gas emission using CME blended diesel fuel.)

3) The Use and Production of Bio-fuel As a Means to Tackle These Issues

The objectives of the introduction of bio-fuel are to:

l Create new markets and industries to stimulate the economy in rural areas;

l Generate employment opportunities in rural areas, especially in the Central Region;

l Increase and stabilize agricultural output, for coconut in particular;

l Increase the farmer’s income in rural areas in order to alleviate poverty;

l Narrow economic disparities between rural and urban areas;

l Narrow economic disparities between regions;

l Reduce Greenhouse Gas (GHG) effects, especially those of carbon dioxide (CO2); and

l Reduce harmful substances in diesel gas emissions, particularly Particulate Matter (PM)

The raw materials identified as being suitable for the production of bio-diesel are oils made from

coconut, palm, rapeseed, sunflower, soybean, corn and waste frying oil. Among these raw materials, the

coconut is thought to be the most appropriate raw material for the production of bio-diesel for the

following reasons:

l Coconut cultivation has a long history in Vietnam, going back 200 to 300 years;

l Climatic conditions, geography and soil conditions in Vietnam are suitable for the growing of

coconut. (The area below latitude 20o North is suitable for the cultivation of a range of tropical

cash crops, including coconut, and coconut can be planted along the coastline even in soils of high

salinity;

l More than 7 million farmers are already engaged in coconut cultivation;

l Farmers cultivating coconut face difficulties in securing an adequate income due to its downward

trend in price. (The average annual income of one farmer from coconut cultivation is less than

US$200.00 or VND 3 million.):

7 The size of Particulate Matter which causes respiratory disorders, including lung cancer, is less than 2.5 microns. The size of soot emitted from tail pipes of diesel engines (easily detected visually) is more than 10 microns. The Tokyo Metropolitan Government has strictly regulated the emission levels of PM since 2003.

22

l Most of the farmers cultivating coconut are considered to be living below the poverty line and need

assistance to overcome this situation. (Any average annual income below US$360.00 or VND 5.6

million is considered to fall below the poverty threshold.)

l A considerable area of waste land (more than 600,00 ha) is suitable for coconut cultivation,

especially along the Southern Central Coastal Region;

l Coconut is the best material from which to produce the highest quality bio-diesel;

l The potential to establish new industries in rural areas where coconut is grown is high; and

l No palm cultivation has taken place in Vietnam.

23

CHAPTER 2

Socio-economic Features of Vietnam

2.1 Geographic Features of Vietnam

1) Geographic Location

Vietnam is located in the northern, central part of Southeast Asia, with a population of over 82 million

in 2004. Its land area is 331.700 km2 (similar to that of Japan) and shares a border with China in the

north, The People’s Democratic Republic of Laos in the west and the Kingdom of Cambodia in the

southwest. Vietnam’s coastline stretches for about 3,200 km, facing the South China Sea. As seen on the

map, Vietnam forms an S-shape stretching from 23º23’ to 8o00’ North latitude and from 109º28’ East

longitude.

2) Topography

Vietnam is a country of diversified topography including numerous mountains and rivers, highlands,

deltas and coastlines. The Northern Region (or North Mountainous areas and Midlands) is divided into

three large zones: North Western, the North Eastern mountainous zones with their high mountains and

plateaus (the highest being Mt. Fan Xi Pang, 3,143 m high, in the Hoang Lien Son Mountain Range),

and the Red River Delta covering 15,000 km2 of plains.

The Central Region is a narrow strip of land covering mountains, hills, rivers and coastal plains. The

Truong Son Mountain Range stretches throughout the western part of the Central Region. The Central

Highlands are located in the southwestern part of the Central Region, comprising basalt with an average

altitude of 900 m and covering an area of 5,600 km2.

The Southern Region is less complicated in topography and is characterized by the Mekong River Delta

with its largest plain covering an area of 36,000 km2 of fertile soil. The Cuu Long River system, that

part of the Mekong River running for over 220 km through Southern Vietnam, is divided into the Tien

and the Hau River tributaries with a total water flow of 500 billion m3 per year. An extensive network of

canals and waterways has been developed for transport throughout the region. Rice, fruit trees and

coconut are the major crops grown in this area.

3) Weather and climate.

Vietnam is situated in the tropical zone. The climate is greatly affected by the Asian Monsoon, mainly

the northeast and southeast monsoons, creating two different climate zones in Vietnam. The Northern

Region has two distinct seasons, the hot and rainy season lasting from May till October and the dry and

24

cold season lasting from November till April.

The climate in the Southern Region (from Hai Van Pass southward) is warm throughout the year and

affected by the southeast monsoon. The climate of this region is generally divided into the rainy season

from April until October and the dry season from October to April. In the Mekong Delta, most rain

(50-63% of the yearly total) falls over the Summer -Autumn period when the relative humidity is quite

high. However, depending on geographical location and topography, there are different microclimates

throughout all three regions of Vietnam.

During summer, some provinces in the Central Region experience a hot and dry southwest wind with

very low humidity while in the North and South it is the rainy season with a high humidity content.

Although there are two distinct seasons in the country, Vietnam is still subjected to changes throughout

the four seasons of the year in spring, summer, autumn and winter, especially in the Northern Region.

The average number of sunshine hours per year in Vietnam averages 1,500-2,000 hours with average

solar radiation of over 100 kcal/cm2. Average annual precipitation is 1,500-2,000 mm per year. However,

the distribution of solar radiation differs greatly between regions. The amount of solar radiation exceeds

130 kcal/cm2 per year in the provinces of the Southern Region where the hot, dry season lasts longest.

These natural conditions are quite favorable for growing annual and perennial crops like fruit trees and

coconut.

2.2 Population

1) General

By 2004, the population of Vietnam had reached 82.7 million, growing at a steady rate of between

1.5-1.6% per annum. Rural areas account for 74.2% of the population, as shown in Table 2.1. It is

known that population distribution is an important factor in economic development. The average

population density of Vietnam was 246 persons/km2 in 2003, but this differs greatly between regions.

The delta zones in the North (Red River Delta) and South (Mekong Delta) account for only one sixth of

the total land area but nearly half of the total population. In the mountain and highland regions, the

reverse applies. While the population densities of the Red River and the Mekong Deltas are 1,192 and

424 persons/km2, respectively, those of the North Mountains, Midlands and Central-Highlands areas are

only 104 and 84 persons/km2, respectively.

2) Population growth

Because of the Government’s family planning program that includes a “one or two children” policy

together with other measures, such as encouraging late marriage and the wide spacing of births, the

population growth rate is decreasing slowly. It was only 1.46% in 2003, less than half that of 1960-70,

25

and is expected to gradually decline to 1% over the next 20 years. In addition, by 2002 the fertility rate

was 2.1% and the average life expectancy had risen to 70 years.

Table 2.1 Population Distribution by Region

Population (Million) Region

Land Area (km2)

Total Urban Rural

Share of Rural Population in

total Population (%)

Population density

(persons/km2)

Whole country 329,297 80.9 20.87 60.03 74.2 246 Red river delta 14,806 17.35 3.85 13.79 78.1 1,192

North East 65,328 9.22 1.71 7.51 81.5 141

North West 35,637 2.39 0.31 2.08 87.0 67 North Central Coast 51.513 10.41 1.39 9.02 86.6 202

South Central Coast 33,066 6.9 1.97 4.93 71.4 209 Central Highlands 54,475 4.57 1.26 3.31 72.4 84

South East 34,738 12.88 7.04 5.85 45.4 371

Mekong delta 39,734 16.88 3.34 13.54 80.2 424

Source: Statistical Yearbook 2003

There are 54 ethnic groups in Vietnam. The most numerous are the Kinh people, accounting for 86.83%

of the total population, while the other ethnic groups account for only 13.17% and reside mainly in

remote areas or highlands. Among these 53 other ethnic groups, the Tay, Thai, Muong and Hoa people

comprise the largest groups, each of over one million people. Each ethnic group has its own language

but Vietnamese is used as a common language by all nationalities living in Vietnam.

2.3 Labor and Employment

1) Employment Situation

In 1996, the employed labor force (from 15 to 54 years old) totaled 36.1 million. By April 2003 it had

increased to 41.2 million, with an average annual increase of 1.9% from 1996-2003, as shown in Table

2.2. This rate of increase is even higher than the 1989-1999 population growth rate, as shown in Table

2.2. In general, the 15-34 age group accounts for 50.2% of the total labor force and the 35–54 age group

accounts for 41.8% (2003 data). While the rate of increase in the labor force in urban areas averaged

5.9% from 1996 to 2003, in rural areas this figure was only 0.9%.

This is the reason why the need for rural industrialization is so strongly emphasized by the Government

and why the Project is recommended in order to rectify such an unbalanced employment situation.

26

Table 2.2 Changes in the Employment Situation, 1996-2003

Employment (Age 15–54)

(Million persons) Ave. annual increase, %

Region Total Male Female

Gender Ratio, %

Total Male Female

Whole country

1996 36,09 17,72 18,37 96.5 2003 41,16 21,08 20,08 105.0 1.9 2.6 1.3

Urban area 1996 6,52 3,30 3,21 102.9

2003 9,73 5,18 4,54 114.2 5.9 6.7 5.1

Rural area 1996 29,57 14,42 15,16 95.1

2003 31,43 15,90 15,54 102.3 0.9 1.4 0.4 Source: Survey on Variation of population and labor sources, April 1st, 2003: Principal Results

2) Employment by Economic Sector

According to the statistical data, the new labor force increases by around 1.2-1.3 million people each

year. Seventy-four percent (74%) of the total population in Vietnam resides in rural areas. This means

that it is the agriculture sector, the biggest economic sector in Vietnam, which is expected to absorb

most of this extra labor. The labor distribution among the 3 key economic sectors is presented in Table

2.3. As shown in this table, although the share of labor used by the Agro-Forestry-Fishery sector

(Economic sector I) has decreased over the 1996-2003 period the total labor force working in this sector

still remains high, accounting for 61% of the total.

Table 2.3 Distribution of Employment by Economic Sector (%)

Economic

sector I Economic sector II

Economic sector III

Total Gender

ratio Whole country 61.3 15.7 23.0 100 105.0

Urban 17.7 28.1 54.1 100 Rural 74.7 11.9 13.4 100

Region

Red river delta 56.7 2.06 22.7 100 93.6 North East 76.4 9.2 14.4 100 97.6

North West 86.2 3.2 10.6 100 98.9 North Central Coast 68.4 12.6 19.0 100 95.3

South Central Coast 62.9 15.1 22.0 100 101.6

Central Highlands 77.2 6.4 16.8 100 106.4 South East 33.1 27.6 39.3 100 122.7

Mekong delta 64.2 12.5 23.3 100 119.9

Source: GSO Note: Economic sector I includes: Agriculture, Forestry and Fishery. Economic sector II: Mining and Quarrying, Electricity Manufacture, Water supply distribution and Construction. Economic sector III: Other service sources

27

As shown in this table, the share of the labor force used by rural areas in this economic sector also

remains high (approx. 75% of the total), compared to the other two economic sectors in the rural area.

This indicates that industry and services in rural areas need to be further developed in order to absorb

more of the workforce locally and reduce labor migration from rural to urban areas.

3) Income per capita

Through the realization of economic growth and the adjustment of the minimum wage by the

Government, together with the introduction of the Program of Hunger Eradication and Poverty

Alleviation, the people's income has been improved considerably. However there is still a large

difference in per capita income between regions, as shown in Table 2.4. As shown in this table, per

capita income in the South Central Coast Region is quite low and it is lower than that of the Mekong

and Red River Deltas.

Table2.4 Average Monthly Income per Capita in 2002 by Region

Unit: Thousand Dong at Current Prices

Source of Income Region Salary &

wages Agro-Forestry

& Fishery Non-Agri- Forestry &

Fishery

Other source

Total

Whole country 116.4 101.5 80.6 57.7 356.2 Red river delta 118.5 87.9 83.4 63.4 353.2 North East 70.8 112.6 42.9 42.5 268.8 North West 41.8 115.3 15.3 24.6 197.0 North Central Coast 54.0 88.6 44.1 48.8 235.5 South Central Coast 106.7 78.9 79.3 40.9 305.8 Central Highlands 61.3 121.1 39.0 22.6 244.0 South East 281.4 71.8 158.4 108.1 619.7 Source: Statistical Yearbook 2003

2.4 Regional Economy

1) Overview of the Economy, by Region

In the past 4 years of the five-year plan for socio-economic (2001－2005) development, even though

the economy of Vietnam has had to deal with many difficulties caused by natural calamities, epidemic

diseases, global uncertainties unfavorable to national economic development and increased prices for

imported materials, etc., the Vietnamese economy still continues to grow.

The growth rate in GDP was estimated at 7.26% in 2003, the highest level since 1998 (5.76%) and

second only to that of China. This growth rate is attributed to the growth in exports, domestic

consumption and investment. As a result of the Government liberalization policies and the liberalization

of the economy in recent years, GDP has grown especially rapidly in the industrial and service sectors.

28

The Agro-Forestry and Fishery sector’s share of total GDP declined from 38.7% in 1990 to 21.8% in

2003 while that of the Industry-Construction sector increased from 22.7% to 40.0% over the same

period, with an average growth rate of 8-10% annually over the past 10 years. Over the 200-2003 period

of the 2001-2005 five-year plan, this sector contributed an average annual share of 38.9% of total GDP

with an average annual growth of 13.3%. Table 2.5 summarizes the change in composition of GDP by

economic sector.

Table 2.5 Gross Domestic Product by Economic Sectors (at constant 1994 prices)

of which

Agro-Forestry-Fishery Industry- Construction

Services Year

Total GDP

(billion) Sub-total (billion)

Share in Total

GDP, %

Sub-total (billion)

Share in Total

GDP, %

Sub-total (billion)

Share in Total

GDP, % 1990 131,968 42,003 31.8 33,221 25.2 56,744 43.0 2000 273,666 63,717 23.3 96,913 35.4 113,036 41.3 2001 292,535 65,618 22,4 106,986 36.6 119,931 41.0 2002 313,247 68,350 21.8 117,125 37.4 127,770 40.8 2003 335,989 70,575 21.0 129,247 38.5 136,167 40.5

Growth index (Previous year = 100)

1990 105.09 101.00 102.27 110.19 2000 106.79 104.63 110.07 105.32 2001 106.89 102.98 110.39 106.10 2002 107.08 104.16 109.48 106.54 2003 107.26 103.25 110.35 106.57

Source: GSO, Statistical Yearbook 2003

Although the economy of Vietnam has made significant progress in implementing several areas of the

2001-2005 five-year socio-economic development plan, it has been encountering constraints and

weaknesses that are hindering the realization of some of the desired goals and causing low economic

efficiency, growth disparities among regions and income inequality to become evident. Both the

achievements made and the constraints that the economy is facing are reflected in the respective

regional economies. The economic conditions and key economic factors affecting the South Central

Coast Region are summarized in Table 2.6.

29

Table 2.6 Key Statistics for Vietnam by Region in 2003

Population Output Value Land use in 2002

Region Population

Urban Population

Agro- Forestry &

Fishery

Industry & Const.

Total Agricultural

Land Forestry

land

FDI

Monthly Income

per Capita

Unemploy- ment Rate In

Urban Areas

Million Share (%)

VND Trillion

VND Trillion

Million (Ha)

Share (%)

Share (%)

US$ Million

VND

Thousand

Share (%)

Whole country 80.90 25.80 158.54 302.990 32.93 28.6 36.6 20,065.70 356 5.78

Red river delta 17.65 21.81 24.48 62.276 1.48 57.7 8.2 5,595.80 353 6.37

North East 9.22 18.55 12.27 16.090 6.53 14 43.5 641.1 269 5.94

North West 2.39 12.97 3.06 791 3.57 11.6 32.1 104.4 197 5.19

North Central Coast 10.41 13.35 13.55 11.821 5.15 14.3 144.7 419.3 235 5.45

South Central Coast 6.9 28.55 10.18 15.585 3.31 16.6 36.3 1,661.1 306 5.46

Central Highlands 4.57 27.57 13.65 2.550 5.45 23.6 55.4 168.8 244 4.39

South East 12.88 54.66 17.32 145.208 3.47 48.6 30.7 10,851.1 620 6.08

Mekong delta 16.88 19.79 64.03 29.110 3.97 74.5 9.1 624.1 371 5.26

Non- defined 15.559

Source: GSO, 2003

Note: (a) At constant 1994 prices (b) Excluding the project for oil and gas exploitation at sea (c) FDI means foreign direct investment

30

2.5 Poverty Incidence

1) General

Over the last 3 years, the income of the people has continued to improve as the economy grows. This

has helped keep prices stable. In accordance with the poverty line as set in Decision No

1143/2000/QD/LTTBXH by the Ministry of Labor, Invalids, and Social Affairs (MOLISA), the

number of poor households in Vietnam has been reduced by 934,000 (from 2,804,000 households to

1,867,000 in early 2001). The average reduction is 310,000 poor households per year, indicating an

improvement in the standard of living under the 5-year plan for socio-economic development,

2001-2005. Table 2.7 shows the percentage incidence of poverty, by region.

Table 2.7 Regional Poverty Rates (below the National Poverty Line)

Poverty Ratio

In percent Early 2001 Late 2003 Share by Region

(late 2003) Whole country 17.2 11.0 100.0 Red River delta 9.7 8.1 19.4 North East 22.3 13.8 12.8 North West 33.9 18.7 4.5 North Central Coast 25.6 15.7 19.1 South Central Coast 22.3 12.2 10.3 Central Highlands 24.9 17.4 8.2 South East 8.9 6.3 8.0 Mekong River delta 14.2 9.3 17.7

Note: The national poverty line is defined by MOLISA on the basis of household income. Households are deemed poor if their per capita income falls below some conventional threshold that varies between urban, rural and mountainous areas. Poverty rates are defined as the share of the population with incomes below those thresholds.

2) Poverty Rate in relation to the National Poverty Line.

The average annual income per capita was about $272 from 2001-2003 (Vietnam Household's

Living Standard Survey 2002, GSO). As shown in the above table, the number of poor households

was reduced by 6.2% between 2001 and 2002, with an average reduction rate of 2.1% per annum.

When broken down by provinces, according to the same reference source, the poverty rate was under

5% in 5 provinces and cities; 10-15% in 13 provinces and cities; 15-20% in 16 provinces and cities,

and over 20% in 4 provinces and cities. As reported from 18 provinces and cities, by the end of 2003,

there were 12 districts and 157 communes and precincts that basically had no poor households.

Based on the National Poverty Line Survey, the highest poverty rate registered was in the North

West Mountains region at 18.7%, followed by the Central Highlands at 17.4%, then the North

Central Coast at 15.7% and the North East Mountains and South Central Coast at 12.2%. The lowest

31

poverty rate was seen in the South East region at 6.3%. In general, 90% of the country’s poverty is

still concentrated in rural areas.

.2.6 Environmental Issues

As with several other populated, low-income, developing countries, Vietnam is now facing urgent

issues of environmental preservation and protection. Rapid growth has been accompanied by

damage to natural resources and environmental degradation. High population and population density,

rapid urbanization, industrial and communications development in urban and rural areas have caused

the degradation of air quality, land, forest, coastal and marine resources. As degradation of the

environment starts to affect the living conditions of the people, the protection and preservation of the

environment have become important issues needing urgent consideration.

2.6.1 Environmental issues for Vietnam in the process of development

1) Industrial development and the urban environment.

Economic growth is driven by the growth of industries, services and urban development. However,

the economic activities of many current industries are still based on poor and outdated infrastructure,

technologies and equipment. This causes serious environmental degradation and problems with

urban, industrial air and water pollution. Untreated smoke and other harmful substances from

factories and exhaust gases and smoke from vehicles are major factors making the city atmosphere

hazardous. Together with air and water pollution issues, the pollution caused by solid wastes in both

urban and rural areas is also an important concern for environmental protection. Industrial wastes

that have not been well treated contribute to further degradation of the environment.

2) Rural Environment

The rural environment in Vietnam is concerned with the use of natural resources, agricultural

ecosystems, rural organization and the quality of the living environment. Many of these issues are

closely related to the rural farmers' living conditions. (Report on "Analysis of the Management

Policies for Rural Environment at the Central level", Project VIE/00/018/08, MARD, 2003).

Environmental pollution in the delta regions and degradation of the environment in mountain areas

are the two most serious environmental issues facing rural areas in general. These are becoming

more and more critical since they are closely related to the rapid growth of the rural population

where the poverty situation that has not yet been adequately solved.

The factors that contribute to pollution in rural areas are:

- Inadequate use of insecticides for plant protection.

- Operation of rural industries, including those in small craft villages

32

- Improper access to water resources and water utilization practices in rural areas.

- Effect of resettlement and free migration

2.6.2 Environment and Poverty

Environmental degradation and poverty are closely related concerns. Environmental degradation has

a disproportionate impact on the poor who tend to be more exposed to water and land pollution (as

indicated, roughly 90% of the poor are living in rural areas in Vietnam). In urban areas, they tend to

be more exposed to air pollution. All of this leads to increased mortality and morbidity from

respiratory disease and diarrhea (Source: Delivery on its Promises - Development Report, World

Bank in collaboration with the Asian Development Bank, December 2002), not only for the poor but

also for urban inhabitants in the populated cities.

In Vietnam, many ethnic groups live in remote areas, on steep hilly land in the North East and North

West regions. They are usually poor and their livelihoods are consequently vulnerable to soil

degradation through erosion caused by deforestation. Uncertainty regarding the market and market

prices for agricultural products can also have a negative impact on ecosystem preservation. During

2000-2002, in Ben Tre province of the Mekong River Delta, more than 5,000 ha of coconut trees

were cut down, mostly by poor farmers for whom the poor market prices offered could not

compensate their cost of production. Similar cases have been found in other provinces in the South

and Central Coast Region, such as Phu Yen and Binh Dinh. This reduction of coconut planting area

causes adverse effects on the environment in these rural areas.

2.6.3 Programs and Policies for Environmental Protection

As environmental problems became more evident, the Government of Vietnam established the

Ministry of Natural Resources and Environment. This newly organized ministry is an amalgamation

of the General Department of Land Administration, the General Hydro-Meteorology Department and

the National Environment Agencies. The new Ministry is responsible for the management of land,

water and mineral resources and for environmental protection.

Based upon Decision No. 256/QD-TTg of the Prime Minister, dated 2 December 2003, on the

"Approval of the National Environment Protection Strategy till the year 2010 and with a vision to

2020", 36 programs, projects and plans have since been prepared and approved. The Ministries,

organizations and related agencies involved in the programs and plans stipulated in this strategy are

mandated to carry out all necessary and appropriate actions to preserve and protect the environment

and to limit existing pollution problems as much as possible.

Among the many long-term objectives set forth in the strategy, one is to try to increase the amount of

33

forest coverage to 48% of the total natural land area of the country. Some other programs related to

the Study are listed below:

l Program for air quality improvement in urban areas, to be carried out by the Ministry of

Communication and Transport.

l Program on the establishment and popularization of model ecological-economic villages, to be

conducted by MARD.

It is noted that one of the most important activities spelled out in the above strategy is the protection

of air quality. The direction given to all agencies, based upon their assigned tasks and functions, has

been to strictly control the emission of CO2, CO, NOx, SO2 and dust resulting from industry, power

generation, construction work, agriculture, communication and transport activity, etc.

34

35

CHAPTER 3

Present Situation of the Coconut Industry in Vietnam

3.1 Coconut Production in General

The coconut (Cocos nucifera L) belongs to the order Palmae and is an important industrial crop in

Vietnam, even though it has not yet been considered a key crop for industrialization. It is grown in

several regions and is of relatively high economic value. It has probably the largest number of uses

and the widest variety of food and foodstuff applications of any crop grown in Vietnam, especially

in rural areas.

Coconut trees have long been found in the Central and Southern Delta regions of Vietnam. It is said

that the coconut was carried there from the Indonesian islands, several centuries ago. Cultivation of

the coconut was widespread under the feudal dynasty of Gia Long and Minh Mang Kings. Evidence

found from archaeological sites at Thanh Oai (Ha Tay Province), Ly son (Quang Ngai province) and

the notes made by western merchants in the eighteenth century show that coconut trees had already

appeared in Vietnam many centuries ago (Ben Tre - Land and People, Volume 2 (J), Nguyen Dinh

Chieu Library, Ben Tre, 2000). Under the French administration in the last decade of the 19th and

early 20th centuries, copra8 and oil were exported to France from the southern part of Vietnam.

The coconut tree has been a large part of the Vietnamese peoples’ way of life for a long time and in

some areas it has almost become an identifying logo for specific localities. It has a relatively large

growing area, spreading throughout the provinces of the Central Coast and the Mekong River Delta.

Coconut industries were started early last century with some rudimentary technologies introduced by

the French in the South of Vietnam for oil extraction and soap production for trade purposes.

The coconut is also called the “tree of life”. All parts of the coconut tree and its fruits are useful to

people. Together with rice and bamboo, the coconut is a typical image reflecting the traditional

ecology and beauty of the South Vietnamese countryside. It can be said that the coconut plays an

important role not only in the economy but also in social life, ecology and the environment.

8 Copra is the dried fresh meat of the coconut. It is taken out of the shell after drying under the sun in the dry season or after heating (using waste husks) in the rainy season.

36

3.2 Coconut Planting Areas and Output

1) Area

In Vietnam, the coconut has mostly been grown from Thanh Hoa province ( 20olatitude) southward.

2) Climate

According to Hoang Van Duc and Vietchy9, the ideal rainfall for coconut is an average of 2000 mm

annually, evenly distributed with about 150 mm per month. Sunshine hours should exceed 1800

hours, in total. The temperature range for coconut growth is from 27oC (the most appropriate) to

15oC.

3) Soil

Several types of soil are suitable for coconut cultivation. However, light soils that are well drained

and with the water table more than 50-60 cm below the soil surface are the most favorable growing

conditions for the coconut. Coconut is one of the few trees that can be grown in coastal areas on

sandy land10. This is a characteristic feature of the tree that could help its expansion into large areas

of the Central Coast region.

4) Varieties

Two coconut varieties are grown widely in many regions of Vietnam. They are the tall coconut (C.

nucifera typica) and the dwarf coconut (C. nucifera nana). Some hybrid coconut varieties have also

been introduced recently. The tall, Ta, coconut variety is the most common in Vietnam followed by

the Dau variety and generally they are both used for coconut oil production. Other local varieties

such as Lua, Giay, Sap (with a thick meat layer) are used for drinks and other purposes. Based on

recent research, several new hybrid coconut varieties have just been released and popularized: PB

121 and JVA. JVA was produced at the Dong Go Experimental Center and was grown

experimentally at eight provinces in South Vietnam before its release into mass production.

5) Output by Regions and by Provinces

The areas planted in coconut and the output of each province are given in Appendix–5, Coconut

9 “Some materials about coconut trees” Hoang Van Duc-Vietchy, Agricultural Publishing House, 1983 10 Duong Hong Dat - Coconut: an important economic crop in Vietnam - Journal of Technology Transfer Information, No 10-11

37

Planting Area and Output. The current situation for coconut production is as follows:

l The total planted area of coconut in Vietnam in 2003 was roughly 134,000 ha (GSO) with a

total output of 894,000 t (at an average output of 6.7 t/ha).

l The two largest planted areas of coconut are the Mekong Delta and South Central Coast regions

at around roughly 150,000 ha and 20,000 ha, respectively. Their outputs were around 682,000 t

and 124,000 t (in weight of nuts), respectively, in 2003. The areas planted in coconuts in other

regions are small and not significant in terms of industrial production.

l The Mekong Delta region, alone, comprises most of the area planted in coconut (79%) and

most of the output (76%) with the South Central Coast in second place with 15% and 14%,

respectively. The provinces with the largest coconut planting areas in 2000 were Ben Tre

(37,800 ha) followed by Ca Mau (20,100 ha) and Tra Vinh (10,600 ha). The outputs from these

provinces are 232,000 t, 66,000 t and 70,000 t (in weight of nuts), respectively. In the South

Central Coast, Binh Dinh, Phu Yen and Quang Ngai are the major coconut producing provinces

with 11,500 ha, 5,000 ha and 2,900 ha (2001), respectively.

l The planting area has been decreasing over recent years, especially in the Southern and Central

regions. This decline may be attributed to the following:

Loss of markets: In the early 1990s, the Eastern European market collapsed. According to the

account given by the Quang Ngai DARD, many coconut trees were cut down during 1971-1996,

resulting in a decline from 9,000 ha in 1987 to only 6,420 ha in 1996.

Diseases: A fatal pest and disease outbreak occurred in the late 1990s to early 2000s, seriously

affecting coconut production in both the Southern and Central Coast provinces. In several

provinces, coconut trees were cut down in order to grow other crops which farmers were

advised would give higher returns. Since 2003, the pest and disease problems and their negative

impacts have been mostly overcome.

6) Potential for Expansion of the Coconut Planting Area

Unlike past years, the prices of coconut have been gradually increasing again as local market

demand for both fresh coconut and processed products has slowly increased in each region. Both the

growers and the provincial authorities have gradually acknowledged the advantages and commercial

potential of bio-fuel made from coconut.

The results of an interview survey based on the information obtained from various sources

throughout the study period indicate that there is much potential for the promotion and expans ion of

coconut planting in the key provinces, especially after taking into account the prevailing natural

38

conditions and geography in the South Central Coastal provinces where abundant forest land,

wasteland and vacant coastal areas suitable for coconut planting can be found.

In Quang Nam province alone, it is reported that a 200,000 ha area of hills and forest in the western

part of the province could be exploited and planted with coconut trees, along with an additional

15,000 ha of land along the coast of this province. As acknowledged by the provincial agencies

(particularly the central provinces of Quang Nam, Binh Dinh and Phu Yen) the potential for

expanding coconut production is quite high, provided that favorable and stable conditions can be

maintained and assured.

3.3 Coconut Processing.

1) General

The coconut is a multi-purpose tree used not only in Vietnam but also throughout most of Asia.

Many products can be derived from the coconut and, in the past, people have often used the coconut

as a daily source of both food and drink. Gradually, together with increased socio-economic growth,

more and more products made from coconut materials have been manufactured and commercialized

into a diversified range of commodities.

Processing technique, equipment and related technologies can further enhance the production of

higher quality and value added products for both daily life and for use in different industries. A range

of processing operations can be carried out in a variety of different ways at different levels and

scales and using different techniques, depending on the existing production organization,

infrastructure and the purpose and availability of the production facility.

At present, the main processed products produced from coconut can be classified into two categories

(1) for food and foodstuffs and (2) for industrial and daily use. The main products produced from

coconut in Vietnam are:

Ø Fresh Meat and Copra: Products derived from copra and the fresh meat (endosperm) of the

coconut include coconut oil, refined oil11 and many other kinds of products such as desiccated

coconut, confectionary, coco-milk, cosmetics etc.

Ø Husk and Shell: Products derived from the remaining materials such as husk and shell are coir

fiber, charcoal and activated charcoal carbon (presently in high demand for export). Many

11 The refined coconut oil or so-called Refined Bleached Deodorized coconut oil (RBD) is a primary raw material for the production of Coconut Methyl Ester (CME), otherwise known as Coco-diesel.

39

further sub-products can then also be produced such as rope, mattresses, nets, fine art

handicrafts, etc.

Ø Stem and Leaves: Products derived from the coconut tree include construction board, furniture,

building materials and fine art handicrafts. It should be noted that coconut industries and

coconut processing activities have actively supported many poor households by creating job

opportunities, generating more income and improving the farmer’s livelihood in rural areas in

general and in coconut-growing areas in particular.

2) Organizations for Coconut Processing

Organizations involved with coconut processing include companies, businesses, establishments,

cooperatives, individuals and household enterprises. The scale and level of involvement depend on

the size of the coconut planting area, the market demand and, especially, the interest shown by the

local agencies. In some provinces, joint-venture businesses for coconut processing have begun

operation. Ben Tre province is actively promoting its coconut industry. However, in several other

regions with large areas of coconuts, the processing and marketing of coconut remain quite stagnant.

Advantages that should have accrued from the coconut industry have not been well exploited or

organized.

In the vegetable oil processing industry, both state and private enterprises (including joint-venture

companies) have been involved in the coconut processing business. The National Company for

Vegetable Oils, Aromas and Cosmetics of Vietnam (VOCARIMEX) is a state-owned enterprise

(SOE) run by the MOI which plays an important role in coconut oil processing, producing coconut

crude oil (CNO) and refined oils (RBD). One of its functions is the production, sale and foreign

marketing of vegetable oils, animal fats, products from oil plants, etc.

VOCARIMEX has three subsidiary plants: the Vegetable Oil Plants of Tuong An, Tan Binh and Thu

Duc, all located in Ho Chi Minh City. VOCARIMEX has two vegetable oil joint-venture companies,

namely Golden Hope-Nha Be Edible oils Co. Ltd, located in Ho Chi Minh City, and Cai Lan Oils &

Fats Industries Co. Ltd, located in Ha Long City, Quang Ninh Province, in the North.

The private sector is also involved in the oil processing business. Most of those involved operate

small-scale units furnished with out-of-date facilities. However, their total production still exceeds

that of the state-run oil processing units.

40

3) Current Vegetable Oil Processing Capacity in Vietnam.

Statistics for 2003 show that the total volume of all kinds of vegetable oils processed in Vietnam has

increased from 280,000 t in 2000 to 330,000 t in 2003. The volumes produced by foreign investment,

SOE, and non-SOE sources accounted for 46.7%, 42.1% and 11.2% of this total, respectively, as

shown in Table 3.1.

Table 3.1 Production of Vegetable Oils

Unit: 1000 t Sector 1995 2000 2001 2002 2003

Whole Country 38.6 280.1 282.8 317.1 329.7

State-Owned 24.9 82.2 101.4 130.1 138.7 Non-State 13.6 26.1 26.5 33.2 36.9

Foreign-invested 171.8 154.9 153.8 154.1 Source: GSO, Statistical Yearbook 2003

However coconut oil constituted only a small percentage of the total volume of edible oil produced

in 2002 and this has been continuously decreasing. As shown in Table 3.2, the total volume of

coconut oil produced in Vietnam from 1998-2002 was only 23,000-40,000 t.

Table 3.2 Estimated Production Volumes of Coconut Products (t)

Year Copra Coconut Oil Copra Meal 1998 68,376 40,000 22,300 1999 72,420 40,550 23,900 2000 45,397 25,876 8,539 2001 41,111 23,844 7,630 2002 40,727 23,622 13,236

Source: VOCARIMEX annual report 1998-2002

Data obtained from the same source show that the total installed capacity of the 12 coconut oil plants

in Vietnam in 2002 was 519 t per day (in terms of weight of copra). This indicates that the

processing capacity of coconut oil is quite small in relation to the size of the coconut planting area.

At present, the processing capacity of coconut oil plants owned and operated by the non-state sector

(mainly small-scale production units furnished with simple equipment and traditional technologies)

accounts for more than 50% of the total crude vegetable oil processed. These production units

(enterprises, households and individuals) are situated mainly in the coconut-growing zones of Binh

Dinh, Ben Tre and Tra Vinh provinces. These private and provincial-owned establishments carry out

all processing operations from the purchase of raw materials (whole nuts), preliminary processing

(de-husking, making copra, etc.) through to the pressing of copra to produce CNO. Then, the oil

41

produced is sold to VOCARIMEX for further refining and processing or for export. The refining of

coconut oil is mainly done by the plants owned and operated by the SOEs and joint-venture

establishments. The output of refined oil by the latter accounts for more than 60% of the total

volume produced.

4) Status of Equipment and Applied Technologies

The non-state establishments involved in CNO production are mostly small-scale operations that

have carried out more than 50% of crude oil processing in the vegetable oil sector in recent years.

The Mekong Delta has the advantage of being the coconut-growing zone with the greatest capacity

for crude oil processing in the country. Since 1996, the state-run plants, principally operated by

VOCARIMEX, have introduced advanced technology for oil refining, raising the quality of products

produced in the region.

3.4 Coconut Research and Development

At present, three institutes undertake R&D activities on coconut and vegetable oil. These are the Oil

Plant Institute (OPI), the National Company for Vegetable Oils, Aromas, and Cosmetics of Vietnam

(VOCARIMEX) and the Institute of Food & Foodstuffs (Division of Vegetable oil Processing).

Oil Plant Institute (OPI): The OPI was established in 1980 as the Research Center for Vegetable

Oils and Oily Plants, under the National Institute of Sciences. In 1981, the Center was attached to the

Ministry of Food Industry. In 1987, the Center changed its name to the Institute for Vegetable Oils,

Essential Oils, Aromas and Cosmetics of Vietnam in accordance with the Decision made by the

former Ministry of Agriculture and Food Industry. From June 1993, the Institute was officially

attached to and managed by the Ministry of Light Industry, as part of its broader responsibilities as a

national institution. Since 1995, the Institute has been managed by the Ministry of Industry under its

abbreviated name as the Oil Plants Institute (OPI).

OPI is currently composed of four Divisions and Experimental Centers located in different provinces.

In the late 1980s, the Institute was supported by the UNDP through project VIE 80/006 which aimed

to strengthen the research capacity and the facilities of the institute.

OPI conducted R&D activities and various projects related to the operation of oil plants and the

processing of essential oils. Since 2001, OPI has been officially responsible for work on the national

project for the development of new coconut varieties. In addition to this project, OPI is involved in

research with other national projects dealing with other edible oil processing plants for peanut,

42

soybean, sesame and sunflower. Several key projects in which OPI has been involved in recent years

are listed as follows:

2001 1 Study and Evaluation of the Potential for Development of Several Tropical Oil Plants and Essential Oils (Sunflower, oil palm, etc.)

2 Research and Development on Vegetable Oil Materials through Selection and Multiplication of Varieties and Intensive Cultivation of Perennial Oil Plants (Coconut, cashew nut, etc.)

2003 1 Study of the Selection, Development and Multiplication of High Economic Value Coconut Varieties.

2 Establishment of Economically Effective Inter-cropping Models (Coconut and cocoa, etc.)

3 Research and Development on Production of Several Products from Oil Plants

In collaboration with MARD, under Decision No.4805 QD/BNN-XDCB dated 31 October 2000 and

signed by the Minister of MARD, OPI has been acting as the key institution in charge of the national

project for improvement of coconut varieties, based upon the selection of local, high-performance

varieties and then gradually introducing high-yield, high oil content hybrid varieties for production.

VOCARIMEX: VOCARIMEX is the largest SOE in the vegetable oil production sector. It has

actively participated in scientific, technological and applied research activities since 2001. Several

projects conducted by VOCARIMEX are:

• Establishment of a cleaner production system at the Tan Binh Oil Plant

• Study on the manufacture of equipment for coconut shell spitting and scraping off the

brown layer of coconut meat in order to obtain superior products from fresh coconut at

the Thu Duc Oil Plant. In collaboration with OPI, VOCARIMEX plays an active role in

the planning of raw material production in an attempt to increase the utilization of local

agricultural products for oil processing. Recently, with the support of MOI and in

collaboration with the Institute for Industrial Development Strategy, VOCARIMEX

completed the 2003 project “Planning for Development of the Vegetable Oil Sector of

Vietnam till the Year 2010 with a Vision till 2020”.

Other Research Activities: As part of the technical research program for the development of energy

in Vietnam, several projects on the development and application of renewable energy technologies

have been conducted at both national and ministerial levels.

The Department of Science and Tec hnology of MOI is the key institution in charge of the state

43

management of research and development activities and their projects aim to manage, support and

promote the research activities of the institutions in MOI as well as in other concerned ministries and

agencies. The study of CME development and application in Vietnam is also one of the concerns of

this department. The development of bio-fuel as a renewable alternative energy source has been

included as one component of the research program undertaken by this department.

3.5 Institutional Set-up for the Coconut Industry

3.5.1 Consensus of Related Ministries and Agencies

A survey of the different provinces in Southern and Central Coastal regions provided a general

overview of existing coconut production throughout the country. While the production of coconut in

some provinces has been given a high priority by the provincial authorities, several other provinces

are encountering problems in implementing their plans for developing coconut production, even

though many of these provinces have much potential to further promote the development of a

coconut industry.

It was found that the issue of CME and bio-diesel development and application based upon the use

of provincial natural resources attracted much attention and support from the agencies and

authorities interviewed. Suggested approaches and recommendations, along with the comments

made by the central institutions at different ministries, have also been collected and analyzed.

As regards institutional framework planning, in general, there are already overall economy-wide

policies issued at the Central and Ministerial levels that have great impact on the development of

agriculture, rural industries and agricultural processing. This study will, therefore, deal with

solutions which focus on specific aspects affecting the development of coconut production.

With support from the two Ministries (MOI and MARD) and all agencies of the provinces surveyed,

the following issues (listed below) might be considered as primary references and a preliminary

basis for supporting coconut production.

Both the Ministry of Industry and the Ministry of Agriculture and Rural Development recognize that

supporting coconut production in which the raw materials are then used to produce CME (bio-diesel)

will have several positive and beneficial effects on the national as well as the rural economy.

44

1. The expansion of coconut planting can, in the long-term, help improve the environment of

Vietnam.

2. Effective and optimum utilization of locally available natural resources can be realized

3. The production and consumption of coconut-based bio-diesel (CME) ensures a

sustainable income to farmers/growers in coconut-growing zones by means of a well

organized contract based coconut purchase network.

4. The production and consumption of locally produced CME as an alternative fuel can save

a substantial amount of foreign exchange through the replacement of diesel fuel currently

imported from abroad.

5. The constant purchase and sale of CME from rural industrial areas will stimulate the rural

economy and create value-adding opportunities in rural areas.

6. The enhancement and development of a coconut industry based on the production of

CME will accelerate the transition of the rural economy from traditional farming to an

agriculture based industrial economy.

45

3.5.2 Approaches and Policies for Improvement of the Coconut Industry

1) A Proper Planning Approach

It is vital to prepare a proper plan for the expansion of coconut planting areas, the establishment of

new plantations and the expansion of existing household coconut gardens, if the directive to improve

the coconut industry’s performance through the production of CME or coco-diesel is to succeed. At

present, coconut is grown in many provinces and regions but often in an almost natural state in

plantings that are now many years old. The coconut planting area is widely distributed and scattered

in many small areas and household gardens.

Any plan for the expansion of coconut planting areas and the establishment of a sustainable

bio-diesel production system should focus on the creation of employment and income generation

opportunities in line with the development policies, directions and general plan of both central and

provincial government. It is recommended that this approach be based on the participatory planning

method, which involves a variety of stakeholders so as to fully understand the benefits arising from

the Project as well as the merits of the contractual cultivation system and the way in whic h this could

promote rural industrialization.

2) Improvement of Coconut Production.

This strategy covers multiple initiatives aimed at improving the existing household coconut industry

and plays an important role in enhancing the coconut industry in Vietnam. It involves the following

approaches:

• Improvement of coconut varieties through the selection of good local varieties and gradually

introducing new hybrid coconut varieties to meet the planned demand

• Improved inter-cropping in coconut-growing areas

• Applying appropriate technological procedures to promote intensive cultivation

• Establishment of an integrated coconut processing plant to produce various value added

products.

• Establishment of a financial system providing low interest and a long-term lending period to

support and encourage the participation of private enterprise in rural industrialization through

the production of bio-diesel and other value added products made from coconut.

• Establishment of a financial system and extension service to support both coconut planting and

inter-cropping.

46

3) Improvement of Coconut Varieties

The existing Coconut Nursery Center at Dong Go, managed by OPI, has only a limited capacity at

present. The capacity of the coconut nursery center will need to be expanded in order to meet the

increased demand for varieties when the decision is made to implement the coconut industry

improvement program.

3.5.3 Approach and Policy for the Expansion of Benefits from Coconut Production

Being able to use all parts of the coconut (meat, husk, shell, water, etc.) for processing into a diverse

range of coconut-based products for both daily life and industrial use is of great advantage to the

coconut industry. However, this has not yet been fully made use of. Processing activities using

appropriate technologies to produce those products required by the market will add value to coconut

in several ways. Producers, growers and farmers in the coconut industry can all benefit from the

introduction of new technologies. This, in turn, will support a stable supply of coconut-derived

materials and stable production within the coconut industry.

In order to successfully promote this strategy, the following initiatives are to be encouraged:

• Promotion and transfer of technology and technical advances from the research institutions to

the growers.

• Encouragement and reinforcement of linkages between different coconut-growing zones, and

• Formulation of appropriate policies to promote information and technology transfer and

human resources development

It is noted that these approaches and policies, as mentioned-above, are central to the overall strategy

of sustainable CME production.

3.5.4 Linkages with Other Programs and Policies

The linkages and collaboration between the Ministry of Industry and the Ministry of Agriculture and

Rural Development, at the central government level, and between the Department of Industry and

the Department of Agriculture and Rural Development, at the provincial level, play a very important

part in implementing the program for Vegetable Oils Development in general and for Coconut

Industry Development in particular.

In addition, the following existing programs and policies can also be referred to in the promotion of

industry development in the coconut-growing zones:

47

l Resolution No. 80/2002/QD-TTg on the Policy for Encouraging Contract-based commodity

agro-products consumption between the producers and farm households

l Decree No. 134/2004/ND-CP on Encouragement of Rural Industries

l Decision No 143/2001/QD-TTg on the Approval of the National Target

l Program on Hunger Elimination, Poverty Alleviation and Employment in 2001-2005

l Directive of the Prime Minister No. 24/2003/CP-TTg on developing the Processing Industry for

agro-forestry-fishery products

l Decision No.17/2004/QD-BCN on the approval of Planning for the Development of Vietnam's

Vegetable Oil Industry till the year 2010.

48

49

Chapter 4

The Development of Systems for the Use of Bio-diesel in

Vietnam

4.1 Bio-diesel Production and Processing

The process involved in the production of CME and other value added products included in the

project is outlined below. However, this process should be carefully studied and planned in detail,

taking into account the local conditions in each province.

1) Coconut Collection

Coconut is collected from the planting area by a middleman or other nominated organization and

delivered to the nut collection area (a private house).

2) De-husking Operation

The coconut is collected and piled up for one or two days under the sun in the garden or any other

appropriate place. The husk of the nut is removed by hand using a special tool (a knife with long

handle).

3) Copra Production

De-husked shells are piled up for one or two days under the sun in the garden or any other

appropriate place. The meat inside the shell is then dried prior to removal. The shell is cut into two

pieces. The dried meat is removed from the shell using a special hand tool (a knife with a short

handle). The dried meat (copra) is left under the sun to dry for a further one or two days.

4) Copra Collection

Copra is collected by the organization assigned to deliver it to the Integrated Coconut Processing

Plant (ICPP), together with the husks and cut shells.

5) Coconut Crude Oil Production

Copra collected at the ICPP will be weighed, inspected and stored in the receiving tank or warehouse

for further drying. The water content of copra must be less than 8% to make good quality coconut

crude oil (CNO). Copra is fed into the copra crushing machine to produce finely crushed copra free

50

of any foreign material, especially metals12. Crushed copra is fed into the heated coconut oil

extraction machine (a screw press) to extract the crude coconut oil leaving the copra meal as a

by-product.

6) Processing of By-products

Husks and shells collected at the ICPP will then be graded and the best material selected for further

processing into primary raw materials. The husk is further broken up by machine in order to make

coir and coir dust. The shell is processed into activated charcoal in a high-heat incinerator. The

coconut coir will be used to make rope, mats, textiles, etc. The textile made from coir can be woven

into a geo-textile material which can then be used for soil stabilization and environmental protection

in civil engineering works around the world. Activated charcoal is used in various water treatment

and deodorizing systems, worldwide.

7) Other Industrial Products

Some of the coconut oil extracted from the copra will be further processed into soap, shampoo,

detergent, coconut milk, desiccated-coconut, virgin oil etc. by private enterprises specializing in the

production of their respective products. Those private enterprises will set up their own factory in the

same premises as the ICPP or in the surrounding area. Since the ICPP already possesses a variety of

waste material treatment equipment and facilities the private enterprises do not need to provide their

own solid and liquid waste treatment machines or systems. The virgin oil made from coconut oil is

now becoming famous for its beneficial effects on human skin and is used in health care products

around the world.

8) Bio-diesel Production

Coconut crude oil (CNO) produced at the ICCP is transported to a Bio-diesel Production Plant (BPP)

to be turned into CME. The coconut crude oil is weighed, inspected and placed in the receiving bin

or storage tank. CNO is first processed into RBD then immediately turned into CME by adding

methyl and other catalytic agents. Glycerin extracted during the RBD process is collected separately

for further processing or stockpiled for sale to other users.

9) Shipment of Bio-diesel

The CME produced is inspected and pumped into the storage tank, situated as close as possible to

the loading facility. CME is loaded into liquid chemical tankers (3000–5000 DWT) and transported

to the unloading port where the petroleum products distribution company has their storage tanks.

12 Any plastic material or metal nail, pin, etc. would cause damage to the screw press used for extraction of coconut crude oil from copra and stop the processing operation.

51

10) Distribution of Bio-diesel

The company responsible for the distribution of CME will then blend the CME with diesel at the

desired ratio. Blended diesel fuel containing CME (BDF) will first be transported to the fuel tanks of

the largest users and distributors and finally, from there, to the service stations in the cities.

4.2 Commercialization of Bio-diesel Production

1) Key Elements to Establish a Production and Distribution System for Bio-diesel

A bio-diesel production and distribution system cannot be established simply by adopting the

traditional means used to sell and trade existing coconut products. This is because the market price

of bio-diesel needs to be kept constant and maintained as long as possible at the same price as

petroleum fuel. This requires that the cost of raw materials must not be allowed fluctuate and that a

sufficient stock of product is always maintained so as to ensure a constant supply.

2) Stabilization of Raw Material Prices

The prices of coconut products, like those of any export crop, fluctuate in accordance with changes

in the international market price for these commodities. This is especially true in the case of coconut.

The price of petroleum products also fluctuates in accordance with any change in the international

market price or in the benchmark price of crude oil. The price of petroleum crude oil has recently

recorded the highest price in the history of the petroleum industry, hovering around US$50 per barrel

in November 2004. However, the fluctuations encountered in the price of petroleum products are

much smaller than those of vegetable oil on the international market. Even though the bio-diesel

produced in Vietnam is to be sold on the domestic market, the price should still be kept stable as

possible or fixed for a certain period otherwise it will not be possible to market bio-diesel in a

sustainable manner.

3) Application of the Contract Cultivation System

A stable price for bio-diesel can only come about through the adoption of the contract cultivation

system. In this, the bio-diesel producer purchases the raw material at an agreed quality and for a

fixed price on a long-term contract basis. In return, the bio-diesel producers guarantee to purchase a

contracted volume of raw material on an ongoing basis. The volume of raw material to be sold to the

bio-diesel producer over a set period (monthly or three monthly) is determined by the raw material

producer. The raw material producers are free to sell their remaining products at any volume and at

any price, as they choose.

4) Government Intervention

The fuel distributed and sold at service stations is subsidized by the government so as to avoid acute

52

fluctuations in price and to stabilize production. Countries like Vietnam that have no strategic

stockpile of crude oil or petroleum products and where the private sector’s role in trading and

distributing petroleum products is limited need substantial government support in order to keep

market prices as stable as possible. Therefore, the price of diesel is controlled by the government.

Since the marketing and distribution system for bio-diesel is the same or similar to that of petroleum

diesel, government intervention is needed and the price of bio-diesel should be supported as well. As

well as setting the market price for bio-diesel, government intervention is also needed in the

following areas in order to establish a successful bio-diesel production and distribution system in

Vietnam:

l Formulation of policy on the use of bio-fuel;

l Establishment of guidelines for the production and distribution of bio-fuel;

l Establishment of technical standards;

l Establishment of quality control and inspection systems;

l A subsidy promoting the use of bio-fuel;

l Research and development on bio-fuel and bio-engineering applications;

l Establishment of an institutional financing system for the development of production facilities;

and

l Application of the Clean Development Mechanism

Those areas where government intervention is needed are discussed in detail in Chapter 5.

4.3 Outline of the Project

Assuming that all the conditions required for the use and production of bio-diesel are met, then the

outline of the program will be as follows:

1) Planned Production Schedule

Assuming that annual diesel consumption is 5.3 million KL in 2010 and that coco-diesel is blended

with all diesel fuel at a ratio of 5%, then the estimated coconut cultivation area, number of trees and

number of farmers required are as shown in Table 4.1. The total coconut cultivation area required is

estimated at around 330,000 ha. The total existing coconut cultivation area is around 160,000 ha. A

minimum of 170,000 ha will therefore need to be newly planted with coconut trees. However, not all

coconut-growing areas will be assigned to the production of bio-diesel. Assuming that half of the

existing coconut cultivation area, 80,000 ha, is used for traditional products, then it will be necessary

to plant a further 250,000 ha. There are 11 provinces in the Southern Central Coastal Region.

Therefore, the average coconut cultivation area per province would be in the range of 20,000–25,000

ha.

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Table 4.1 Planned Bio-diesel Production Scheme

Item Unit Volume Assumptions Diesel Consumption KL/year 5,360,000 Projected at 2010 CME Requirement KL/year 268,000 CME is blended at 5% with all diesel RBD Requirement KL/year 335,000 Conversion Ratio is 80% CNO Requirement KL/year 380,700 Conversion Ratio is 88% Copra Requirement t/year 726,400 Conversion Ratio is 70% Nut Requirement t/year 3,773,500 Conversion Ratio is 19% Nut Requirement 1000 pcs./year 2,360,000 Average weight of nut is 1,600 g Tree Requirement trees 39,000 Number of nuts per tree is 60 pcs. Area Requirement Hectare 390,000 Trees per hectare is 100 (10m x 10m) Coconut Farmers Farm household 1,310,000 Farmer owns 0.30 ha Number of Population Population 5,240,000 Average persons per household is 4. Source: Study Team 2) Size of the Coco-diesel Market

The bio-diesel program envisages substituting bio-diesel for 5% of total diesel consumption. As

shown in Table 4.2, the actual pump price of diesel in Vietnam is VND 5,100 per L.

Table 4.2 Assessment of the Real Market Price of Diesel, as of August 2004

MOPS*1 Value per Barrel US$50.00 VND 775,000 MOPS Value per Liter US$ 0.30 VND 4,586 CIF Vietnam*2 Value per Liter US$ 0.35 VND 5,360 Distribution Cost*3 Cost per Liter US$ 0.02 VND 270 Actual Pump Price*4 Value per Liter US$ 0.37 VND 5,630 Source: Study Team Note: 1. MOPS means the Mean of Platts Singapore (Regional commodity exchange price) as quoted for

Diesel Fuel on 4th August 2004. It is likely to increase further in the future. 2. Conversion rate is 169 L per barrel. 3. CIF cost is estimated based on current maritime transport costs. 4. Distribution cost is assumed to be US 2c per L. 5. Actual pump price given is an assumption made by the Study Team.

Assuming the actual cost of importing the diesel is VND 5,600 per L (US$0.358/L) then the total

foreign exchange needed would be US$78.75 million.

3) Acceptable Market Price for Coco-diesel

Bio-diesel is commonly used in the form of a blend with petroleum diesel. The blending ratio is

determined according to the conditions of supply of the products, raw materials, technical

considerations, etc. According to the Bio-diesel Handbook published by the Department of Energy

of the United States of America, the maximum blending ratio for bio-diesel is 20%. Bio-diesel of any

kind has a relatively high solvency and may, therefore, cause problems with plastic or rubber parts in

the fuel injection system. This study assumes that a 5% blend of 100% coco-diesel with petroleum

54

diesel will be used. This is called B5 for short. The acceptable market price for coco-diesel is

computed at VND 8,960 per L, as shown in Table 4.3.

Table 4.3 Probable Market Price of Coco-diesel (100%)

Item Unit Value Remarks

A Blending Ratio of Coco-diesel % 5 Assumed as B5 B Blending Ratio of Diesel % 95 B = 100 - A C Pump Price of Diesel VND/L 4,800 As of August 2004 D Actual Pump Price of Diesel VND/L 5,600 Refer Table 6.2 E Premium Price Rate of Increase 3% Government Intervention F Pump Price of B5*1 VND/L 5,768 F = D x (100 + D)/100 G Value of Diesel VND 5,320 G = D x B/100 H Value of Coco-diesel VND 448 H = F - G I Value of Coco-diesel VND/L 8,960 I = H/A x 100 J Value of Coco-diesel in US$ US$/L 1.34 J = I/15,600 Source: Study Team 1) Pump price of B5 is assumed to be increased, taking into consideration the enhancement of the rural

development program based on the bio-diesel production program. Assuming that the acceptable market price of coco-diesel is VND 8,960 or US$0.574 per L, then the

market size for bio-diesel is estimated to be VND 2.4 trillion or approximately US$152 million per

year. However, in this study, the price of coco-diesel is assumed to be VND 5,600 per L, which is

equal to the actual price of diesel without any subsidy.

4) Typical Model Configuration for Bio-diesel Production

A system to produce 250,000 KL of coco-diesel has been planned, aiming to bring the maximum

benefit to the rural areas where coconut cultivation takes place. This system comprises the coconut

cultivation area, a coconut crude oil production plant, a bio-diesel production plant, and loading

facilities for subsequent transport. This zonal development scheme for a rural industrialization

program based on the production of bio-diesel made primarily from coconut can be described as a

“Coconut Industrial Zone” (CIZ) with 40,000 ha of coconut per zone. The conceptual production

scheme for a single coconut industrial zone is illustrated in Figure 4.1 and an outline of the facilities

involved is discussed below.

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Figure 4.1 Conceptual Arrangement of a Coconut Industrial Zone (50,000 ha.)

Legend: One third (1/3) of this capacity is planned as an experimental model zone.

Storage Tanks

No.1 Coconut Cultivation Area 5,000 ha

No.2 Coconut Cultivation Area 5,000 ha

No.3 Coconut Cultivation Area 5,000 ha

No.4 Coconut Cultivation Area 5,000 ha

No.5 Coconut Cultivation Area 5,000 ha

No.6 Coconut Cultivation Area 5,000 ha

No.7 Coconut Cultivation Area 5,000 ha

No.8 Coconut Cultivation Area 5,000 ha

No.9 Coconut Cultivation Area 5,000 ha

No.10 Coconut Cultivation Area 5,000 ha

No.1 Integrated CNO Plant, 30 KL/day

No.2 Integrated CNO Plant, 30 KL/day

No.3 Integrated CNO Plant, 30 KL/day

No.4 Integrated CNO Plant, 30 KL/day

No.5 Integrated CNO Plant, 30 KL/day

Bio-diesel Production Plant 100 KL/day

Loading Facility

MARKET

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1. Coconut Cultivation Area

In Vietnam, most of the farmland is owned and cultivated by small-scale farm households. The

average coconut area per farm is 0.2-0.30 ha. The farmers cultivate not only coconut but also other

tree crops and vegetables in between the coconut trees or in a backyard garden. In view of the total

area and number of farmers involved, 5,000 ha or 17,000 farmers are considered appropriate as a

manageable unit to organize as a single group of growers. It is estimated that one (1) ha of coconuts

produces around 1,000 L of CNO which can then produce 680 L of coco-diesel. Ten groups, each

with 5,000 ha, are organized as one (1) bio-diesel production zone of 40,000 ha in total. Thus, each

zone comprises 50,000 ha exclusively used for the production of bio-diesel.

2. An Integrated Coconut Processing Plant (ICPP)

It is evident that the larger the production capacity the more cost effective the processing operation

will be. However, the distance between oil mills also needs to be carefully considered in case the

cost of transporting raw materials becomes too large, making the operation ineffective. It is ther efore

planned that each coconut oil mill, with a capacity of 30 KL per day, will service two groups of

coconut farmers or 10,000 ha of coconut cultivation area. Two (2) coconut cultivation areas will

produce enough copra to produce around 10,000 KL of CNO per year. This plant is designed not

only to produce CNO but also copra meal as by-product. The copra meal can then be further

processed into value added products using bioengineering technology. Likewise, the coconut shell

and husk can be processed using industrial technology. While this plant produces mainly CNO, it can

best be described as an Integrated Coconut Processing Plant (ICPP).

3. Bio-diesel Production Plant (BPP)

This plant produces coco-diesel, otherwise known as Coconut Methyl Ester (CME), at a rate of 100 t

per day. The raw material for CME is the CNO. In order to produce 100 t of CME per day, five (5)

ICPPs are required, covering an area of 40,000 ha. This means that one (1) CME plant will be

provided for every 40,000 ha of coconut cultivation area in each province along the Southern Central

Coastal Region.

4. Loading Facility

The loading facility is composed of storage tanks to store CME, CNO, etc. and warehouses to store

copra meal, activated charcoal and the geo-textiles produced from the coconut shell and husk.

Although CME is the major product to be transported to the distributor’s receiving tank by coastal

tanker, CNO will also be transported by tanker wherever and whenever the need arises. Since the

copra meal produced as a by-product will also be transported by sea to both domestic and export

markets, the planned loading facility will be able to handle both liquid and bulk cargo.

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5. Facilities and Initial Capital Requirement

The targeted production volume of bio-diesel is 225,000 KL per year or 700 KL per day. Therefore a

further seven (7) of these model zones will be required. Table 4.4 provides indicative figures on the

number of units that will be required by 2010.

Table 4.4 Facilities and Initial Capital Requirement

Item Unit Zone 8 Zones in Total

Unit Cost (US$ Million)

Amount (US$ Million)

Existing Coconut Area ha 160,000 Coconut Area Needed ha 50,000 400,000 Development Area ha 240,000 0.001 240 Integrated Coconut Plant*1 Unit 5 40 5.000 200 Bio-diesel Plant*2 Unit 1 8 18.000 144 Loading Facility (Port)*3 Unit 1 8 2.000 16 Total (US$ Million) 600 Total (VND Trillion) 9,360 Source: Study Team

1. Copra is collected from the surrounding coconut cultivation area and processed into CNO at the ICCP.

2. The coconut shell is processed into activated charcoal; husks are processed into geo-textiles, etc. and part of the CNO is processed into soap, detergent and/or industrial alcohol, etc.

3. Each CIZ has a commercial port which can accommodate 3,000–5,000 DWT tankers.

4.4 Examination of the Price Structure of Bio-diesel

1) Price Structure of Coconut

As discussed in the preceding section, the use of contract cultivation is one of the key elements in

realizing a stable price for bio-diesel products (coco-diesel) while still ensuring a sustainable income

for farmers. However, the minimum sale price paid at the farm gate for coconut, copra (dried meat),

shell, husk, etc. needs to be appropriate and acceptable to the farmers engaged in coconut cultivation.

In this section, the pricing of coconut products is examined, based on the assumption that the use and

production of coco-diesel is streamlined.

2) Coconut Products

The different parts of the coconut tree and its nut can be used in many ways and in many different

forms such as:

1. Leaves for roofing material;

2. Stems for construction material;

3. Husks for rope, textile and domestic fuel;

4. Husks can also be processed into geo-textiles for use in civil engineering;

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5. Shells for handicrafts;

6. Shells can also be processed into activated charcoal;

7. Water/milk can be processed into pharmaceutical products;

8. Fresh meat for juice and food;

9. Dried meat (copra) for various foodstuffs such as cooking oil, confectionary and the like;

10. Coconut oil can be processed into soap, detergent, oleo-chemical products and the like;

11. Coconut meal can be used for animal feed;

12. Coconut meal can also be processed into medicines for animal husbandry, etc.

13. And more

Every part of the coconut can be utilized in some way and sold in the market. This is the reason why

the coconut tree is called the “Tree of Life”. Coconut meat is dried and turned to copra. The copra is

the raw material then used to produce Coconut Crude Oil (CNO) by squeezing crushed copra

through a screw press. CNO is then further refined to produce Refined Bleached Deodorized coconut

oil (RBD). The RBD then undergoes trans-Esterification to produce Coconut Methyl Ester (CME) or,

in other words, coco-diesel.

3) Determination of Conversion Factors

The weight of each component of the coconut was analyzed using data collected throughout the

study. Table 4.5 summarizes these weights, together with the conversion factors used for deriving

one product from the other.

Table 4.5 Coconut Components and Conversion Factors

Component Weight (g) Component/Nut

weight (%) Conversion

Factor A. Whole Nut 1,600 100% B Husk 432 27% C Shell 288 18% D Water 440 28% E. Meat 440 28% F Copra (Dried) 308 19% F/E = 70% G Crude Oil (CNO) 185 12% G/F = 60% H Refined Oil (RBD) 163 10% H/G = 88% I Coco-diesel (CME) 130 8% I/H = 80% J Activated Charcoal 144 9% J/C = 30% K Coir 130 8% K/B = 30%

Source: Study Team Note:

① Average weights from item A to E are based on data from the Oil Plant Institute. ② Average weights from item F to J are based on other data from various reports.

59

4) Present Farm Gate Price of Copra

The average farm gate price for coconut in the Mekong Delta Area is in the range of VND

1,500–2,000 per nut, as of September 2004. However, in the Southern Central Coastal Region this

price is VND 800–1,000. This difference in price can be attributed to a difference in market

character and geography. In the central region, the majority of nuts are purchased by middlemen and

de-husked before being sold to the coconut oil mill located in the Mekong Delta area. The price

quoted in the Mekong Delta area is the raw material price for processing into semi-industrial

products such as crude oil, desiccated coconut, etc., while the lower price quoted elsewhere is solely

for coconuts consumed fresh without any industrial processing. If the price being offered by the

bio-diesel producer is only around VND 2,000 per nut, as mentioned above, then the farmers in the

Mekong Delta area may not agree to sell their products, unlike the farmers of the central region for

whom a minimum price of VND 2000 would be more than they usually get at present.

4.5 Assessment of Farmer’s Income

The probable prices of raw material (copra) purchased from the farmers by the CNO producers and

of CNO purchased by the CME producers have been analyzed by backward computation, which

fixes the Financial Internal Rate of Return (FIRR) at 8%.

The average annual income of a coconut farmer in the Central Region is VND 5.0 million (US$320).

Of this total annual income, VND 2.0 million comes from growing coconuts and VND 3.0 million

comes from other crops cultivated nearby. The purchase price paid by the CNO producer to supply

CNO to the Bio-diesel producer is estimated at around VND 2,730 per nut and the purchase price of

copra is estimated at VND 3,000 (US$0.20) per kg. As the average market price of coconut in the

Southern Central Coastal Region is less than half this, VND 800–1,000 as of October 2004, the

coconut growers in this region will be pleased with the purchase price offered. However, around 1/3

of the total value of the nut is in its copra. Since the price of nut, given above, is based on the

assumption that shell and husk can be industrially processed in order to gain considerable added

value, the utilization of shell and husk must be maximized as much as possible.

Judging from this analysis of price structure from the raw material through to the final products, the

market price of CME can be set at VND 5,600 per L, which is the actual price of unsubsidized diesel

sold at service stations.

2) Value of Nuts

The major parts of the nut used as raw materials for industrial products are copra (dried meat), husk

and shell. The copra is the raw material used for the production of CNO and, consequently, of CME.

60

The husk is used to produce textile products such as rope, mats and geo-textiles. Geo-textiles are

woven or non-woven textile products often used for the prevention of soil-erosion and in

landscaping. The shell is used as a raw material in the production of activated charcoal which is

often used as a deodorizing material and in water purification works. At present, the coconut is

traded in the form of a whole nut or de-husked shell. The farm gate price for each part of the nut is

estimated and analyzed in Table 4.6.

Table 4.6 Values of the Whole Nut and Its Component Parts

Part of Coconut Copra Husk Shell Whole Nut

Farm Gate Price 936 904 892 2,733 Source: Study Team Note:

1. Average weight of nut is assumed to be 1,600 g. 2. Yields of raw material (by weight) utilized for the production of saleable products are 100% for

copra, 60% for husk and 40% for shell. 3. Sale price of products made from husk is assumed to be VND 4,650 (US$0.30) per kg. 4. Sale price of products made from shell is assumed to be VND 7,750 (US$0.50) per kg.

3) Contractual Cultivation and Sustainable Purchase of Copra

The price of copra can be set at VND 3,000 (US$0.20) per kg and VND 936 (US$0.53) per nut,

assuming the market price for 100% CME is VND 5,600 per L and on the condition that the program

is approved as a CDM project. The value of whole nut can then be set at VND 2,733 per nut. The

key factor in making the coco-diesel promotion program successful is the stabilization of the raw

material price and ensuring its constant supply. In order to stabilize the price and guarantee the

supply of raw material it is essential that a long-term sale and purchase agreement between the

farmers and the bio-diesel producer is concluded and maintained.

In the past, contract cultivation has been applied to sugarcane in the Southern Region and coconut in

the Southern Central Coastal Region for the production of refined sugar and coconut crude oil.

However, these were not successful because of the drop in sugar and coconut prices on the

international market. As for the coconut project, the collapse of Eastern Block markets was a factor

contributing directly to the failure of the contract cultivation system. The chief reasons for such

failures were, therefore, that the products were aimed at the international market and that the final

product’s price fluctuated in parallel with fluctuations in the international market price.

However, the planned target for the bio-diesel to be produced by the Project is the domestic market,

with fairly rigid price and continued purchase provisions. Thus, the contract cultivation method can

be easily applied to the Project. However, in some areas of Vietnam where a higher sale price for

nuts or copra is accepted by the purchaser or importer then such fixed price provisions may be

difficult to introduce. It depends entirely on the choices made by the farmers who cultivate coconut.

61

If the coconut farmers agree to produce copra at a fixed price and at a fixed volume per month for

one or two years then they would benefit from a constant income which would then enable them to

enter into other business, increasing their income even more. The coconut farmer is free to enter into

contract cultivation with the bio-diesel producers or CNO producers with either part or all of his

expected total production. The farmer can dispose of any remaining product in whatever way he

chooses, making the most of any opportunity to generate more income, but totally at his own risk.

4) Inter-cropping Systems in Areas Planted with Coconuts

An advantage of coconut cultivation, when compared with other crops suitable for the production of

bio-diesel, is that the space between the trees can be utilized for the cultivation of other crops in

order to meet market demand and provide diversified sources of income. This is called an

inter-cropping system. In this Study, there are assumed to be 100 coconut trees per ha, each 10 m

apart, so as to make inter-cropping easier. The average number of coconut trees per ha at present is

144, with trees only 8 m apart, making it rather difficult to grow vegetables in between because of

the shade. Possible crops for inter-cropping among coconut trees are cassava, cacao, coffee, and

vegetables of all kinds. The cassava leaves can be used as food for rearing wild-silk moths. The

cocoon made by wild-silk moths then provides extra income for the farmers. Cattle breeding has also

been suggested, as it would provide natural fertilizer to the coconut trees. In this study, any

examination of the probable additional income for the farmers due to the adoption of inter-cropping

has been omitted but it is certain that some added value will be derived from the coconut plantations.

5) Enhancement of Rural Industrialization through Promotion of Bio-diesel Production

The area of coconut needed to meet the demand for coconut-based bio-diesel is estimated at 390,000

ha, assuming the target-blending ratio of BDF is 5% in 2010. As present, 160,000 ha are already

growing coconut and around 80,000 ha are soon to be planted. In Vietnam, the coconut is planted

and managed by small landholder farmers (averaging approximately 0.30 ha each) or in the backyard

of the farmer’s own land. Therefore, existing coconut plantings are widely scattered throughout the

coconut-growing regions. The area suitable for growing coconut extends from Thua-Thien Hue to

Ca Mau province. Most of the vacant land available for new coconut planting is located along the

coastline of the Southern Central Coastal Region, comprising Thua-Thien Hue, Quang Nam, Quang

Ngay, Bin Dinh, Phu Yen and Khanh Hoa provinces.

It is estimated that seven (7) bio-diesel production plants with a production capacity of 100 t per day

will be needed, one (1) unit for each zone comprising 40,000 ha of coconut.

Because the coconut cultivation areas are spread out and scattered along the coastline it is

recommended that the CNO plants be sited in strategic locations so as to minimize transport costs.

62

Five (5) CNO plants with a production capacity of 30 KL of CNO per day are planned for each zone.

This CNO plant will be designed to process a range of materials such as copra, shell and husk and is

therefore called an Integrated Coconut Processing Plant (ICCP).

CNO contains lauric oils (characterized by a predominance or C12 and C14 triglycerides). CNO is

an important feedstock for the oleo-chemical industry. Lauric oils are important sources of fatty

alcohols and methyl esters that are used in detergent and surfactant manufacture. Although

petroleum-based alternatives are available, environmental concerns have favored the use of these

biodegradable products. Therefore, an oleo-chemical industry can be established in and around the

ICPP.

4.6 Application of CDM and Emission Trade

As this project will reduce carbon dioxide (CO2) emissions, the potential for approval as a CDM

project by the relevant authorities in Vietnam and by the United Nations was also assessed. Table 4.7

shows the results of this assessment of the Project.

Judging from the results of the preliminary financial feasibility study, it is strongly recommended

that application be made as a CDM project, unless there are other difficulties yet to be considered.

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Table 4.7 Price of Products and Farmer’s Income as part of the CDM Project

Item Value CME (VND per L) 5,600 CNO (VND per L) 4,930 Copra (VND per kg) 2,668 Income (US$ per year) 336 Copra (US$ per year) 106 Shell (US$ per year) 145 Husk (US$ per year) 145 Income (VND thousand per year) 5,200 Price of Nut 2,630 Copra Price per Nut 834

Source: Study Team Note: 14. Capital investment cost for the CME plant is assumed to be US$25 million per unit. 15. Capital investment cost for the CNO plant is assumed to be US$5 million per unit. 16. No capital investment costs for new coconut cultivation areas are considered. 17. Investors in the Project will invest US$50 million to operate 1 unit of CME plant and 5 units of

CNO plant, covering one coconut zone. 18. Invested amount is paid back from the proceeds of the Emission Trade over 14 consecutive

years . 19. CO2 emissions from 1 L of diesel are assumed to be 2.644 kgCO2/L. 20. CO2 sequestration due to newly planted coconut areas is assumed to be 4.76 tCO2/ha. 21. The area newly planted with coconut is assumed to be 30,000 ha. 22. Unit value of CO2 for the Emission Trade is assumed to be US$6 per t. 23. The period of the Project is assumed to be 14 years.

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65

Chapter 5 Development Plan

5.1 Development Time Frame

1) Target Year

It is planned to have at least one zone in operation by 2011, seven (7) years from now (2005). Figure

7.1 illustrates the indicative development time frame.

2) Necessary Actions

Since this program is starting from scratch, stepwise development is essential in order to establish

the use and production of bio-diesel made from coconut. It is proposed that the following necessary

actions be taken:

Administrative Area

1. Identification of project stakeholders

2. Preparation of development direction

3. Consensus building among project stakeholders

4. Policy formulation on the use of bio-fuel

5. Preparation of a development master plan

6. Establishment of technical standards

7. Establishment of a quality inspection system

8. Establishment of development guidelines for the production of raw materials

9. Establishment of development guidelines for the production of bio-diesel

10. Study on the use of a subsidy for promoting bio-diesel

11. Identification of several large-scale user(s) of BDF

12. Supporting contract with the bio-diesel producer and the user

13. Research and development into bio-fuel and bio-engineering applications

14. Financial arrangements

15. Capacity building of administrative staff in central government

16. Capacity building of managerial staff in the production area

Technical Areas

2. Design of a model plant

3. Establishment of the organization to operate the model plant

4. Construction of a model plant

66

5. Experimental production and distribution of bio-diesel

6. Experimental planting of selected coconut species

7. Experimental inter-cropping

Implementation of the Program

1. Establishment of the organization to operate the bio-diesel production plant

2. Establishment of the organization to operate the coconut crude oil (CNO) production plant

3. Establishment of the organization to produce various by-products in the ICCP

4. Establishment of the contract cultivation system to supply raw materials

5. Design and construction of the bio-diesel production plant and the ICCP

6. Expansion of coconut planting areas and CIZs

Figure5.1 Indicative Development Timeframe

Project Year 1 2 3 4 5 6 7 Administrative Area 2005 2006 2007 2008 2009 2010 2011 1 Consensus Building 2 Policy Framework 3 Development M/P 4 Formulation of Regulations Model Plant (3 tpd) 1 Feasibility Study 2 Model Plant Design 3 Construction of Plant 4 Experimental Production Facility Development (100 tpd) 1 Financial Arrangements 2 Organizing System 3 Design of Facility 4 Construction of Facility 5 Production and Distribution Coconut Area Development (30,000 ha)

Source: Study Team Note:

1) M/P means the program development master plan. 2) Formulation of regulations includes technical standards, handling guidelines, etc. 3) Model plant’s capacity is tentatively planned to be 3 t per day. 4) Target production volume is 100 t of bio-diesel per day or 32,000 t.

3) Execution of Model Plant Operation

Coconut-based bio-diesel is a new product in Vietnam so some experimentation will be essential to

test the whole system. It is therefore suggested that the model bio-diesel production plant operate at

3 to 10 t per day, testing the whole system from raw material production through to distribution of

the final product and training the administrative and managerial staff in both central and provincial

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governments in the process.

4) Administrative and Organizational Set-up

The agency responsible for the implementation of the Project is the Ministry of Industry. The Rural

Industrial Department of the Ministry of Industry is thought to be the core unit that will manage the

project. The research and development of technology and the management of the system will be

undertaken chiefly by the Oil Plant Institution of the Ministry of Industry. The ministries of

Agriculture & Rural Development, Science & Technology, Natural Resources & Environment as

well as the Provincial Industry Department of the Ministry of Industry, in coordination with their

related Departments (Science & Technology, Agriculture, etc.), will collaborate closely with the

MOI to implement the program.

5.2 Funding Program

1) Source of Funds

There are various possible ways to utilize ODA sources to arrange technical collaboration programs,

project loans or export credits from Japan.

2) CDM Application

At present, the necessary authorities such as the Designated National Authority (DNA) and the

Operation Entity (OE) etc. needed to verify the CDM application have not yet been appointed in

Vietnam. The CDM application for the Project will therefore be carried out in parallel with the

preparation of this verification system.

5.3 Model Coconut Industrial Zone

1) Model Province

It is planned to establish a belt of 4-5 CIZs stretching for around 1,000 km along the Southern

Central Coast Region. The first CIZ is planned for Bin Dinh Province since this province is located

in the center of the region and has a deep-sea port ideally situated for the delivery of product to the

two major users, namely Hanoi and Ho Chi Minh City. Binh Dinh Province will therefore host the

model CIZ for the Project.

2) Project Profile

The Project is designed to promote the proposed rural development program through the production

of bio-diesel. The profile of the Project is shown on the next page. The Terms of Reference for the

consulting services are given in Appendix-7

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Table 5.1 Profile of the Proposed Project in Binh Dinh Province

Project Title Establishment of a Model Coconut Industrial Zone Project Location Binh Dinh Province Executing Agency Ministry of Industry Responsible Division Rural Industrial Development Division Outline of the Project The Project will develop a coconut planting area and establish processing facilities producing coconut-based bio-diesel as its main product, thereby enhancing rural industrialization in a sustainable manner, reducing the dependence on imported energy, contributing to cleaner diesel gas emissions throughout the country, narrowing the economic gap between regions, and alleviating poverty in the central region. The Project is designed as a model project for further expansion throughout the country at a later stage.

Objective of the Project 1. Enhancement of rural industrialization through the production of bio-diesel

based on coconut as its raw material; 2. Increased income for coconut growers 3. Improvement of living standards for the rural population

Project Component 1. Facility Plan 1. 100 tpd bio-diesel production plant 1 unit

2. 30 tpd coconut crude oil mill 5 units 3. Coconut planting 40,000 ha

2. Capacity Building Program 1. Training on planning the coconut industrial zone 2. Management of bio-diesel production 3. Operation of bio-diesel production facilities

Project Cost 1. Bio-diesel production plant VND 390 billion

2. Coconut crude oil mill VND 635 billion 3. Coconut planting VND 315 billion 4. Total Cost VND 1,350 billion

($25.0 mil.) ($40.0 mil.) ($20.0 mil.) ($95.0 mil.)

Expected Output Production Volume Bio-diesel made from coconut 32,000 KL/year

Crude coconut oil 54,000 KL/year

Share in Total Diesel 0.75% of diesel consumption of 5.3 million KL/year Expected Total Income Bio-diesel made from coconut VND 180 billion

Crude coconut oil VND 256 billion ($11.5 mil.) ($16.4 mil.)

Number of Farmers 134,000 small-holder farmers Expected Income per Farmer Minimum VND 4.5 million (excluding income from

inter-cropping) up to VND 9.0 million in total ($320-$600 per year)

Pilot Project Project Location Quy Nhon City (beside Quy Nhon Port) Facility Plan 1. 10 tpd bio-diesel production plant 1 unit

2. 10 tpd coconut crude oil mill 1 unit

69

TECHNICAL PAPERS

Paper 1 Overview of the Agriculture and Rural Development

Paper 2 Perspectives of Bio-diesel Production in the World

Paper 3 Japanese Experience of Rural Industrial Development

70

71

TECHNICAL PAPER-1

Overview of Agriculture and Rural Development

1.1 Agriculture -Forestry-Fishery Sector

The GDP of the Agriculture-Forestry-Fishery (AFF) Sector grew at an average rate of 4.1% per

annum from 1988-2002. The important achievements of this sector were reflected in the remarkably

rapid growth in food production from 1996-2000. Since 2001, the structure of this sector has been

changing from staple food production to commodities production. The AFF sector accounted for

around 22% of total national GDP in 2003, down from 30% in 1993. In accordance with Resolution

N0.15-NQ/TW, dated 8 March 2002, of the 5th Central Party Committee, the industry and services

share in the total output of the AFF sector is directed to increase while the farming share is to be

allowed to decrease through the means of crop diversification.

1.1.1 Current Status of AFF

1) Total Output of the AFF Sector

Although the AFF Sector’s share of total GDP declined from 26.2% in 1995 to 21.8% in 2003, its

value increased from 51.3 trillion Dong to 70.5 trillion Dong (at constant 1994 prices) and the value

of this sector is still growing steadily. Table 1.1 shows the sector’s changes of output.

2) Output of the Fishery Sub-sector

The fishery sub-sector of AFF has grown at a moderate pace over the past 3 years and has

contributed significantly to national exports. Aquaculture and shrimp production have grown rapidly,

helping to promote the fishery sub-sector further. Therefore, the share of the fishery sub-sector in

total AFF output has increased from 10.3% in 1995 to 12% in 2003. In 2002, revenues from fishery

exports were about $2 billion Dong, an increase of US$200 million compared to 2001. It is estimated

that the export turnover of this sub-sector will reach the target set in the five-year plan (2001-2005)

by 2004.

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Table 1.1 Output Structure of the Agri-Forestry-Fishery Sector (at 1994 constant prices)

Unit. Billion Dong No. 1995 2000 2001 2002 2003 I Agri- Forestry- Fishery 51,319 63,717 65,618 68,350 70,575 1 Agriculture 43,658 54,493 55,613 57,912 59,545 2 Forestry 2,399 2,544 2,556 2,568 2,589 3 Fishery 5,262 6,680 7,449 7,872 8,440 II Industry and construction 58,550 96,913 106,986 117,125 129,247 III Services 85,698 113,036 119,931 127,770 136,167 Total (I + II + III) 195,567 273,666 292,535 313,247 335,988 Annual Growth rate, % I Agri-Forestry-Fishery 4.8 4.6 3.0 4.2 3.3 1 Agriculture 4.4 4.1 2.1 4.1 2.8 2 Forestry 5.9 0.3 0.5 0.5 0.8 3 Fishery 8.2 11.6 11.5 5.7 7.2 II Industry and construction 13.6 10.1 10.4 9.5 10.4 III Services 9.8 5.3 6.1 6.5 6.6 Whole country 9.5 6.8 6.9 7.1 7.3 Source: Statistical Yearbook, 2003

3) Rice Production

Rice production has increased through the adoption of intensive cultivation. A large area of low

quality rice planting land has been shifted to aquaculture or the production of fruits and industrial

crops. By 2003, the amount of land in rice production had decreased by 217,000 ha, since 2000, with

a current area of 7.449 million ha still in production. This reduction was highest in the Mekong delta

region at 165,000 ha. However, total rice output still increased from 32.5 million t in 2000 to 34.5

million t in 2003, which surpasses the target set in the five-year plan. Table 1.2 shows the changes in

rice production from 1995-2003.

Table 1.2 Rice Production (1995-2003)

Year Volume AAGR (%)

Area

(1000 ha.) Output

(1000 t) Area

(1000 ha) Output

(1000 t) 1995 6,766 24,964 2.5 6.1 1998 7,363 29,146 3.7 5.9 1999 7,648 31,394 4 7.7 2000 7,666 32,530 0.2 3.6 2001 7,493 32,108 (-)2.3 (-)1.3 2002 7,504 34,447 0.2 7.3 2003 7,449 34,519 (-)0,7 0.2

Source: GSO Statistical Yearbook 2003 Note: AAGR means Average Annual Growth Rate

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4) Development of Rural Industry

The rural economy has been expanding and the share of rural industry and services has been

increasing in the AFF sector as well. For instance, the total export value of artisan crafts and fine-art

handicrafts increased to reach an export turnover of $367 million in 2003. It is expected to reach

$450 million in 2004, increasing at a rate of 22.6% per year.

5) Exports of Agricultural Products

Total exports in the AFF Sector in 2003 amounted to $3.24 billion, an increase of 7% from 2002.

Table 1.3 shows the change in amounts of key agricultural products exported.

The export volumes of rice, coffee, rubber and cashew nuts in 2003 were 4 million t, 674,000 t,

438,000 t and 438,000 t, respectively. The export value of forestry products was US$623.4 million.

Table 1.3 Agricultural Production

1995 2000 2001 2002 2003

Agricultural Production (at current prices) Value in Billion Dong Agriculture Gross Output 85,508 129,141 130,178 145,022 153,770 Farming 66,794 101,044 101,403 111,172 115,888 Livestock 16,168 24,960 25,502 30,575 34,431 Services 2,546 3,137 3,273 3,275 3,451 Share (%) Agriculture Gross Output 100.0 100.0 100.0 100.0 100.0 Farming 78.1 78.2 77.9 76.7 75.4 Livestock 18.9 19.3 19.6 21.1 22.4 Services 3.0 2.5 2.5 2.2 2.2

Agricultural Production (at current prices) Value in Billion Dongs Agriculture Gross Output 82,307 112,112 114,990 122,150 127,111 Farming 66,183 90,858 92,907 98,061 101,210 Livestock 13,629 18,506 19,283 21,200 22,945 Services 2,495 2,748 2,800 2,889 2,956 Annual Growth Rate (%) Agriculture Gross Output 6.9 5.4 2.6 6.2 4.1 Farming 7.3 5.2 2.3 5.5 3.2 Livestock 4.8 6.7 4.2 9.9 8.2 Services 6.6 3.7 1.9 3.2 2.3

1.1.2 Key Issues in the AFF Sector

1) Slow Structural Change

Farming is still the dominant AFF component and no significant change in this structure has

occurred even by the 4th year of 5-year plan (2001–2005). This means that the available resources

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have not been fully utilized or exploited by each region and that the pace of industrialization in the

agriculture sector is unexpectedly slow. Eighty percent of the population is still involved in the

agriculture sector while the output of the AFF sector still accounts for only 21.8% of the total

national GDP. This means that the production performance and income of the rural population is far

lower than that of urban areas. This requires a more effective approach in order to increase

production and bring about a shift towards more industry in the AFF sector in general and in the

agriculture sub-sector in particular.

2) Large Disparity of Production by Region

The output value per unit of agricultural land averages a mere 17-18 million Dong per hectare per

year. In addition, the output value of the agriculture sub-sector differs greatly by region, as shown in

Table 1.4.

Table1.4 Output Value of the Agriculture Sector, by Region

(In constant 1994 prices)

Unit: Billion Dong

1995 2000 2001 2002 Whole country 82,307 112,112 114,990 122,150 Red river 16,576 20,898 21,262 22,209 North East 6,550 8,595 8,956 9,928 North West 1,567 2,083 2,139 2,357 North Central Coast 7,396 9,767 10,106 10,529 South Central Coast 5,150 6,154 6,236 6,320 Central Highlands 4,725 11,449 13,730 13,103 South East 9,095 12,541 12,973 13,435 Mekong R Delta 31,248 40,625 39,588 44,269

Share (%) Whole country 100 100 100 100 Red river 20.1 18.6 18.5 18.2 North East 7.9 7.7 7.8 8.1 North West 1.9 1.9 1.9 1.9 North Central Coast 9.0 8.7 8.8 8.6 South Central Coast 6.3 5.5 5.4 5.2 Central Highlands 5.7 10.2 11.9 10.7 South East 11.1 11.2 11.3 11.0

Mekong Delta 38.0 36.2 34.4 36.3

Source: GSO, Statistical Yearbook 2003

The lowest shares are seen in North West and South Central Coast at 1.9% and 5.2% in 2003,

respectively, while the respective figures in the Red River delta and Mekong River delta are 18.2%

and 36.3%.

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1.2 Industrial Crops

1.2.1 Production of Industrial Crops

The key annual industrial crops in Vietnam, with the highest production, are sugarcane, coconut,

peanut, coffee, etc. In 2002, these annual industrial crops covered an area of 845,800 ha. Their

annual rate of growth in 2001 was 7.6%, compared to about 8.7% in 2000. It is estimated that the

area planted in annual industrial crops may reach 900,000 ha due to the increase in areas of soybeans

and cotton. Table 1.5 shows the change in cultivated areas of these industrial crops. As shown in this

table, most of the cultivated areas of annual industrial crops increased, except for jute and tobacco.

The areas of most of the perennial industrial crops produced increased sharply, except for coconut,

which has shown a consistent decrease.

Table 1.5 Cultivated Area of Industrial Crops (in 1000 ha)

1995 2000 2001 2002 2003 I Annual industrial crops 1 Cotton 17.5 18.6 27.7 34.1 28.6 2 Jute 7.5 5.5 7.8 9.8 4.8 3 Rushes 10.4 9.3 9.7 12.3 13.8 4 Sugarcane 224.8 302.3 290.7 320.0 306.4 5 Peanuts 259.9 244.9 244.6 246.7 242.8 6 Soybeans 121.1 124.1 140.3 158.6 166.5 7 Tobacco 27.7 24.4 24.4 26.6 23.8 II Perennial industrial crops 1 Tea 66.7 87.7 98.3 109.3 116.2 2 Coffee 186.4 561.9 565.3 531.3 513.7 3 Rubber 278.4 412.0 415.8 429.0 436.5 4 Pepper 7.0 27.9 36.1 43.5 49.7 5 Coconut 172.9 161.3 155.8 147.1 135.8

Source: GSO; Vietnam Agriculture and Rural Area in the Renovation period 1986-2002, Hanoi, 2003

The annual production of industrial crops has also changed, almost in accordance with the changes

in cultivated area shown in Table 1.6. However, among the perennial industrial crops, coconut shows

a significant decrease.

As shown in these tables, the production of annual industrial crops has grown continuously. This

may, as planned, have been due to the successful progress made in crop diversification. From

1995-2002, the areas of these crops in cultivation increased to 139,200 ha at an AAGR of 17.2%.

Cotton and sugarcane recorded the highest increases. The reason for this increase is that the

Government directed an attempt to develop selected local industrial crop products in order to reduce

the need to import them from abroad.

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Table1.6 Annual Production Volume of Industrial Crops 1995 2000 2001 2002 2003 Production (thousand t) I Annual industrial crops 1 Cotton 12.8 18.8 33.6 40.0 35.2 2 Jute 14.8 11.3 14.6 20.4 12.5 3 Rushes 75.5 61.4 64.5 88.1 95.3 4 Sugarcane 10,711.0 15,044.0 14,657.0 17,120.0 16,525.0 5 Peanuts 334.5 355.3 363.1 400.4 409.3 6 Soybeans 125.5 149.3 173.7 205.6 225.3 7 Tobacco 27.7 27.1 32 33.2 32.8 II Perennial industrial crops 1 Tea 40.2 69.9 75.7 94.2 94.5 2 Coffee 218.0 802.5 840.6 699.5 771.2 3 Rubber 124.7 290.8 312.6 298.2 313.9 4 Pepper 9.3 39.2 44.4 46.8 70.1 5 Coconut 1,165.3 884.8 892 915.2 920.0

Source: GSO; Vietnam Agriculture and Rural Area in the Renovation period 1986-2002, Hanoi 2003

As shown in Table1.6, among those perennial industrial crops listed, only coconut’s annual

production volume has decreased.

Table1.7 Average Yield of Industrial Crops (t per ha) 1995 2000 2001 2002 2003 Average yield (t/ha) I Annual industrial crops 1 Cotton 0.73 1.01 1.21 1.17 1.23 2 Jute 1.97 2.05 1.87 2.08 2.60 3 Rushes 7.27 6.60 6.65 7.16 6.91 4 Sugarcane 47.65 49.77 50.42 53.50 53.93 5 Peanuts 1.29 1.45 1.48 1.62 1.67 6 Soybeans 1.04 1.20 1.24 1.30 1.35 7 Tobacco 0.99 1.11 1.31 1.25 1.38 II Perennial industrial crops 1 Tea 0.70 0.80 0.80 0.80 0.81 2 Coffee 1.20 1.40 1.50 1.30 1.50 3 Rubber 0.5 0.70 0.80 0.80 0.72 4 Pepper .1.30 1.40 1.20 1.20 1.41 5 Coconut 7.80 5.50 5.70 5.70 6.80

Source: GSO; Vietnam Agriculture and Rural Area in the Renovation period 1986-2002, Hanoi 2003

As shown in Table 1.7, among all the industrial crops listed, only coconut’s average yie ld of

production has decreased since 1995.

1.2.2 Perennial Industrial Crops

The main perennial industrial crops include tea, coffee, rubber, pepper and coconut. The areas of

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each and their respective outputs are as shown in Tables 1.5, 1.6 and 1.7. Descriptions of each

perennial industrial crop, except coconut, are as follows: (See Chapter 4 for coconut details)

1) Coffee

Coffee has been grown in Vietnam for hundreds of years, ever since trade started with Europe, but

the significant expansion of cultivation only started in 1975. By 1995, the area of coffee grown was

still only 186,400 ha but, by 2002, it had drastically expanded to 565,000 ha, 3 times as much as in

1995.

The key coffee growing zones are located in the provinces of Dak Lak, Lam Dong, Gia Lai and

Dong Nai. These provinces produce mainly Robusta beans. About 95% of all coffee produced in

Vietnam is for export. In 2000, Vietnam exported 660,000 t of coffee, making Vietnam the second

largest coffee producer after Brazil. The export turnover reached $560 million, which was higher

than that of rice in the same year. However, this sudden increase in coffee exports created many

problems. Tens of thousands of hectares of forest in the Central Highlands were cut down for coffee

production. (Vietnam Agric ulture and Rural Area in the Renovation Period, 1986-2002, Nguyen Sinh

Cuc, Hanoi 2003).

The coffee output in Vietnam doubled in the period between 1997 and 2001, reaching 841,000 t. The

dominant variety of coffee produced in Vietnam is the low-priced Robusta. As the world coffee price

declined so too has much of the world coffee production been reorganized. MARD is planning to

reduce the total coffee-growing area down to 500,000 ha by 2005 and switch the variety of coffee

produced from the low-priced Robusta to the premium Arabica variety, which currently accounts for

only 2% of total production.

2) Rubber

Rubber is a perennial industrial crop that is grown widely throughout the South. It starts to produce

latex 7 years after planting and collection of the latex can continue for 30 to 35 years. At present,

Vietnam has two intensive rubber growing zones (in the South East and Central Highlands). In

addition, the planting area for this crop has been extended into other provinces in the North Central

Coast region like Quang Tri, Quang Binh, Ha Tinh, Nghe An, etc.

Rubber production has stabilized during recent years. In terms of area cultivated, it expanded from

278,000 ha in 1995 to 437,000 ha in 2003, with an average yield of 0.75-0.80 t of latex per hectare.

Currently, 80% of all rubber is grown by the Vietnam Rubber Corporation. In general, the rubber

industry has benefited from expanding its cultivated area and by replanting with new, high yielding

varieties.

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Rubber yield increased remarkably from 0.27 t/ha in 1985 to 0.80 t/ha in 2002. The quality of

processed rubber has improved gradually, helping promote the consumption and export of processed

products. According to forecasts, as of 2005, the demand for natural rubber is expected to be 7.4

million t per year and the consumption of natural rubber will continue to increase.

3) Tea

The land and climate of Vietnam are quite suitable for tea plantations in selected zones. The most

popular tea growing zones are concentrated in the North Mountains and Central Highlands regions.

Their products supply both the domestic and the export market. The tea growing area expanded at a

steady rate from 1995 (17,500 ha) to 2002 (34,100 ha) and the tea output increased from 40,200 t in

1995 to 94,500 t in 2003. However, there has not been a big change in tea yield, which remains at

roughly 0.80 t/ha.

In 2003, Vietnam produced 94,500 t of tea with an export value of $85 million. In general, tea

production and development have experienced many difficulties due to the uncertainties of the world

market. However, improvements in tea production and processing over recent years have gradually

helped the industry regain a relatively stable position in the market both at home and abroad. The

main constraints facing the tea industry at present are small-scale production, improper use of

insecticides and out-of-date processing technologies, all of which will need to be overcome in the

future.

1.2.3 Export of Industrial Crops

1) Current situation.

The export of agricultural products is an important part of the five-year and ten-year socio-economic

plans for the strategic development of the economy of Vietnam. According to the GSO's Publication

on the Socio-Economy of Vietnam in 2001-2003 (Hanoi, 2003) describing the groups of

commodities exported, agricultural exports have not obtained the results expected. In recent years,

there has been severe competition with neighboring countries on price and quality. An analysis of the

competitiveness of current Vietnamese agricultural products in terms of cost, post-harvest

technologies, quality, types and the potential for increasing output, etc. has resulted in the following

ranking of the product groups. The high competitiveness group includes rice, coffee, cashew and

aquaculture products. The medium competitiveness group includes vegetables and fruits, forest

products, rubber and peanuts, etc. Products from animal husbandry, milk, sugar from sugarcane and

vegetable oils etc. are included in the low competitiveness group. Coconut is not included in any of

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these groups because export volumes are quite limited. (Socio-Economy of Vietnam in 2001-2003;

GSO; Hanoi, 2003).

Table 1.8 summarizes the exports of the most valuable, key industrial crops from 1998 to 2003. In

2002, coffee ranked first ($324 million) followed by rubber ($272 million) and cashew ($209

million). Black pepper and tea are among those with lowest export turnovers: $109 million and $85

million, respectively.

Table 1.8 Exports of Main Industrial Crops (in US$ Million)

1998 1999 2000 2001 2002 2003

Tea 51 45 70 78 85 85 Volume (1000 t) 33 36 56 68 77 60

Unit value US$/t) 1,545 1,250 1,250 1,150 1,103 Coffee 594 585 501 391 324

Volume (1000 t) 382 182 734 931 722 749 Unit value US$/t) 1,555 1,214 683 420 449

Cashew nut 117 108 167 153 209 Volume (1000 t) 16 18 34 44 62 84

Unit value US$/t) 7,313 5,978 4,892 3,474 3,358 Pepper 64 137 146 91 109

Volume (1000 t) 15 35 37 57 78 74 Unit value US$/t) 4,267 3,914 3,943 1,601 1,399

Rubber 127 147 166 166 272 Volume (1000 t) 191 265 273 308 455 433

Unit value US$/t) 665 555 607 539 597 Source: GSO, Statistical Yearbook 2003 and General Dept. of Customs Joint Donor Report to the Vietnam Consultative Group meeting, 2-3 December 2003 Note: The data for 2003 are preliminary only.

2) Export Price of Industrial Crops

Table 1.8 shows how the unit prices of agricultural products in the international market have varied

over the past 5 years (1998-2002). In general, the unit value of most key industrial products has

declined significantly. For coffee, the unit price fell significantly from $1,555 per t in 1995 down to

$449 per t in 2002. The same downward trend is seen in the case of pepper, though not so

pronounced.

1.2.4 Direction of Agro-industrial Development

In most cases, industrialization in rural areas is based on the utilization of locally available products.

In the case of Vietnam, the basis for rural industrialization might therefore be agricultural products in

general and industrial crops in particular. As discussed above, most industrial crops are facing

problems in further industrialization since their unit value has either not matched their expansion of

planting area, not met with their planned target value, or not secured an adequate return on

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investment.

One of the reasons for this adverse trend is that all these industrial products are sold on the

international market and many of these products are also the traditional export crops of other

agricultural countries. The historical legacy of colonialism is that such traditional crops are thought

to be classic items for export. Some items should be processed by more modern industrial means, in

order to add more value. However, tea, coffee, cashew nut, pepper and rubber are not considered as

suitable products for such value added activities.

The one industrial product listed above that is not considered a key crop for export and

industrialization is the coconut.

The coconut is called “the tree of life” since each part of the coconut tree has long been used for

many different purposes: the leaf and stem for building houses and the coconut for drinking, cooking

and washing. Thanks to recent technological advances, the coconut is now considered the best

material from which to produce bio-diesel fuel and, because of the automobile and the internal

combustion engine, there is a large, stable and valuable domestic market for this product. The

direction of rural industrial development based on agricultural products should therefore include the

production of bio-diesel fuel made from coconut.

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TECHNICAL PAPER – 2

Perspectives of Bio-diesel Production in the World

2.1 Alternative Fuel Use around the World

1) Background to the Use of Bio-fuel around the World

Since the early 1980s and the experience of the worldwide oil crisis, technological developments

aimed at energy conservation have attracted keen attention from those industrial countries seeking to

reduce their consumption of hydrocarbon based fuels in order to forestall the effects of possible

future price-hikes due to any further shortages of crude oil. In some developing countries where

suitable raw material is available, such as in Brazil, the development of biomass energy has made

much progress, significantly reducing the use of foreign exchange to import crude oil as well as

helping to secure the income of sugar growers. Recently, the price of crude oil has again been

increasing, reaching the highest prices ever recorded in the history of petroleum trade. Those

countries depending heavily on imported crude oil to supply their energy needs and having a

considerable volume of raw material with which to produce bio-fuel have became very keen to

develop bio-fuel products in order to reduce the use of petroleum fuel.

2) Increased Concern to Reduce Carbon Dioxide Emissions

Since the late 1990s, the global consensus on the need to prevent climate change by reducing the

emission of Greenhouse Gases (GHGs) has been strengthened and international cooperation has

increased accordingly. Among the various gases composing GHGs, carbon dioxide is considered the

major contributor to global warming. The use of bio-fuel can reduce carbon dioxide emissions

because this fuel is made from vegetables or plants which grow by absorbing carbon dioxide directly

from the atmosphere. In the 3rd Conference of the Parties to the United Nations Framework

Convention of Climate Change held in Kyoto, Japan, in December 1997 (COP3 of UNFCCC), an

important international agreement concerned with the prevention of climate change was signed by

180 countries. The Kyoto Protocol13 proposed the establishment of an international mechanism

with some flexibility to realize the reduction of GHG emissions based on the Emission Trade14

between developed countries and developing countries. This mechanism is known as the "Clean

Development Mechanism"15 . The CDM is designed to promote sustainable development by

13 The Kyoto Protocol is an international agreement to prevent climate change, signed by 180 countries in December 1997. See Appendix-1 for details. 14 Emission Trading is the mechanism for trading the ownership of reduced GHGs on the open market. See Appendix-2 for details. 15 CDM is a mechanism to enhance investment from developed countries to developing countries where the project

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enabling industrialized countries to finance emission-reduction projects in developing countries and

receive credit for doing so. Now that Russia has ratified the CDM, this will become effective from

February 2005.

The Project proposed in this report is designed not only to promote rural industrialization through

the use and production of bio-fuel but also to reduce carbon dioxide emissions and to clean up diesel

gas emissions. Therefore, the Project can be considered a candidate project eligible for recognition

as a Clean Development Mechanism project.

3) Present Situation of Bio-fuel Use around the World

Bio-fuels can be categorized into two types. The first type is Ethanol, which is used as an alternative

fuel for gasoline. The raw materials most commonly used to produce Ethanol are sugarcane and

molasses. The second type is bio-diesel, which is used as an alternative to diesel fuel. The raw

materials most commonly used to produce bio-diesel are oils made from coconut, palm, rapeseed,

sunflower, canola, etc. Both types of bio-fuel are most commonly used by blending with petroleum

fuel. Ethanol blended with gasoline is called GASOHOL in several countries. Bio-diesel blended

with diesel is called Bio-diesel Blended Fuel or BDF. The blending ratio varies from 1-20%

according to various factors such as the price of the product, market demand, raw material supply,

etc. In the case of Ethanol, the proportion of Ethanol blended with gasoline is expressed as E10, E20,

etc. In the case of BDF, it is expressed as B1, B5, B10, etc. Table2.1 summarizes the present use of

bio-fuel around the world.

5.2 Potential for Bio-fuel Production in Vietnam

1) Raw Materials Available for the Production of Bio-fuel

Research and development into renewable and alternative fuel use has been underway in Vietnam

but it is still at an early stage. Since these raw materials are already abundant in Vietnam, Ethanol

could be produced from sugarcane molasses and Bio-diesel could be produced from coconut

immediately if the necessary production technologies were imported and developed to suit local

conditions.

2) The Most Suitable Kind of Bio-diesel to Produce and Use in Vietnam

As seen in Table 2.1, many of the major automobile using countries already use Ethanol as an

alternative fuel for gasoline and bio-diesel as an alternative fuel for diesel. The total volume of

bio-diesel consumed in the EU has now almost reached 2.0 million KL per year, despite being only a ensuring reduction of GHGs is designed and authorized by both the countries involved and the UNFCCC to trade certified emission reductions through the emission trade system. See Appenidix-3 for details.

83

few hundred KL per year around 10 years ago. The major raw materials for the production of

Ethanol in Europe are sugarcane (molasses) and, for bio-diesel, rapeseed and sunflower. In Asia, the

cultivation of rapeseed and sunflower is limited but the cultivation of coconut and palm trees

accounts for almost 75% of the total world production. Thus, coconuts and oil palms are the most

prominent raw materials from which to produce bio-fuel in Asia.

In the case of Vietnam, coconut is thought to be the best raw material for the production of bio-fuel,

for the following reasons:

1. Climatic and soil conditions in Vietnam, especially from Tua Thin Hue south to the tip of

southern Vietnam, are suitable for growing coconut;

2. The Southern Central Coastal Region has a vast area available for the expansion of coconut

planting;

3. No significant plantings of oil palm exist in Vietnam;

4. Diesel fuel consumption accounts for more than 80% of total petroleum consumption; and

5. Coconut farmers are searching for a better income from coconut cultivation.

3) Bio-diesel made from Coconut

Bio-diesel made from coconut was used by the military in the Philippines during WWII. The

Philippines has been the world leader in terms of coconut production and trade since the 1970s.

However, their coconut industry has been facing difficulties due to the downward trend in coconut

oil prices on the international market. Since the mid 1990s, the Philippines has had been trying to

create new markets for its coconut industry. In 1998, the combined efforts of the private sector and

academic research successfully developed a trans-Esterification process able to produce bio-diesel

based on coconut, perfectly matching the industrial standards of petroleum diesel.

The total coconut planting area in Vietnam is around 250,000 ha, according to OPI estimates.

Although coconut production has traditionally been part of the agricultural activity of smallholder

farmers in Vietnam, cultivation and processing have not been highly organized since the coconut has

not been considered a key crop by the government. The production of bio-diesel made from coconut

is therefore being carefully studied and planned in an integrated manner so that the coconut industry

can become a basis for rural industrialization in the future, with coconut being processed into various

kinds of industrial products.

4) Bio-ethanol Made from Sugarcane

Sugarcane molasses is used as a raw material to produce ethanol and sugar-based bio-ethanol is

widely used as a blending material with gasoline to produce GASOHOL in the USA and Brazil. The

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primary reason for using sugar-based bio-ethanol is not to reduce carbon dioxide levels but to

support the sugarcane business, especially in the USA. In order to increase the octane rating of

gasoline, Methyl Tertiary Butyl Ether (MTBE) has been used, but some states in the USA now

prohibit the use of MTBE as it has been found to be harmful to human health and able to cause

cancer. Bio-ethanol is considered an alternative octane booster in regular gasoline. The use of

bio-ethanol blended with gasoline has therefore been emphasized. However, increased NOx and

hydrocarbon levels have also been observed.

The total area of sugarcane planted in Vietnam is around 350,000 ha of which 2/3 is in the Southern

Region. The price of refined sugar on the international market is comparatively high and not

competitive with sugar produced in Thailand and other countries. A substantial number of sugar

refineries are State Owned Enterprises which require an improvement in operational and managerial

efficiency. The use of sugarcane as the raw material for bio-ethanol and blending with gasoline

therefore requires a properly planned and integrated approach.

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Table 2.1 Outline of Bio-fuel Use around the World Type Ethanol Bio-diesel

Country Situation Remarks Situation Remarks USA 130,000,000 KL E10 76,000 KL B2, B20 Corn is the major

raw material and ethanol is distributed in major cities.

Soybean is the major raw material. There are 89 gas stations (2003)

Germany None None 1,000,000 KL Max. B20 Rapeseed is the major

raw material. There are 1,500 gas stations (10%)

France 280,000 KL Substitute ETBE 440,000 KL Max. B5 Wheat is the major

raw material. Rapeseed (280,000

ha) and sunflower (50,000 ha) are the major raw materials.

Italy None None 350,000 KL Max. B20 Sunflower Slovakia None None 60,000 KL Sunflower Austria None None 45,000 KL Sunflower UK None None 30,000 KL Rapeseed Sweden 60,000 KL N.A. 30,000 KL Rapeseed Brazil 14,000,000 KL E20 None None Sugarcane is the

major raw material.

China 3,000,000 KL E10 None None Sugarcane is the

major raw material.

India 500,000 KL E5 Starting B5 – B10 Since 2003 and

targeted at E10 MOU was concluded

between Indian Petroleum and Indian Rail

Thailand Starting E10 Testing B2 Sugarcane is the raw

material. Targeted for all gasoline by 2011.

Palm oil is the major raw material. Targeted at B2 by 2011.

Philippines None None 400 KL B1 Coconut is the major

raw material. All government vehicles use B1 (2004)

Japan None None 400 KL Limited use Waste frying oil

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The product made from coconut with similar or better characteristics than petroleum diesel is called

Coconut Methyl Ester (CME). Its popular name is coco-diesel. The standard specifications of

coco-diesel and petroleum diesel are compared in Table 2.2.

Table 2.2 Comparison of Specifications between Coco-diesel and Petroleum Diesel

Item Unit Coco-diesel

(Best Quality) Coco-diesel

(Phil. Standards) Petroleum Diesel

(JIS) Density at 15ºC g/cm3 0.8735 Sulfur Content % 0.001 Max. 0.05 Max. 0.05 Cetane Number 62 Min. 42 Min. 45 Flash Point ºC 108 Max. 100 Min. 45 Pour Point ºC - 7.5 - - 7.5 Viscosity mm2/S 2.50 2.0–4.5 Min. 1.7 Source: 1) Best quality coco-diesel specifications were obtained from Chemrez Inc. of the Philippines. 2) The Coco-diesel standard for the Philippines is from the Department of Energy of the Philippines. 3) Japanese standards are regulated by the Ministry of Economy, Trade and Industry Note: Coco-diesel standards are set for pure CME without blending with petroleum diesel.

As seen in Table 2.2, coco-diesel is superior to petroleum diesel in various ways such as Cetane

Number. Thus, it can be used without any performance related problems.

5) Effect of Coco-diesel in Cleaning Gas Emissions

It is known that all bio-diesels are able to reduce the volume of Particulate Matter (PM) contained in

diesel exhaust gas emissions. The reduction in PM due to blending CME with petroleum diesel was

measured and tested in Japan in June 2003. According to the results of these analyses, it was

concluded that coco-diesel blended diesel fuel has the following effects on exhaust gases (see Table

2.3).

Table 2.3 Effects of Coco-diesel on Exhaust Gas Emissions

CME Blending Ratio 10% 20% Reduction Ratio of PM 30% 40% Reduction Ratio of Hydrocarbons 17% 23% Reduction Ratio of Carbon Dioxide No Change No Change Reduction Ratio of NOx Slight Reduction Slight Reduction Reduction Ratio of Carbon Monoxide Slight Reduction Slight Reduction

Source: Test Report of CME Blended Diesel Fuel’s Effects on Exhaust Gas Emission, Nippon University, 2003 Note: See Appendix-1 Reports on Coco-diesel Emission Tests, Nippon University, June 2003

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There are several mechanical ways to reduce the PM16 content in diesel engine exhaust gas

emissions, such as DPFs (Diesel Particulate Filters) and the like. A DPF is a mechanical filter

inserted between the engine and the exhaust tail pipe. Over the past 20 years, Japan has also found

that systematic vehicle inspection tests, carried out on all vehicles at regular intervals, also help

reduce PM levels. However, the financial cost of these methods is quite high and they are not easy to

implement unless institutional finance is backed up by central or local government. Even in Japan,

only the Tokyo Metropolitan Government requires that all vehicles operated within Tokyo should be

equipped with DPFs and that they obtain the necessary permit from the relevant TMG authority.

In contrast to these rather costly and expensive methods to control PM levels in diesel gas emissions,

bio-diesel will be able to obtain the same or similar result as DPF without any modification or

retrofitting of the engine. As shown in the above table, the use of bio-diesel blended fuel (coco-diesel

in particular) would have several beneficial effects on air quality, especially in heavy traffic urban

areas where most diesel driven vehicles are concentrated.

6) Effect of Bio-diesel in Reducing Carbon Dioxide Emissions

Bio-diesel is a fuel made from plants. Although it emits carbon dioxide when burnt as a fuel, just like

petroleum diesel, bio-diesel and bio-fuel do not add to the net volume of carbon dioxide entering the

atmosphere because the plant material used to produce bio-fuel also absorbs carbon dioxide as it

grows. This is called a carbon neutral effect.

It is believed that the sort of global climate change that has been occurring could potentially prove

fatal to human life. One cause of this climate change is believed to be the increasing volume of

Greenhouse Gases (GHGs). The major component of GHGs affecting global warming is carbon

dioxide. When hydrocarbon-based fuels are pumped out from underground and burnt in the

atmosphere, it significantly increases the volume of carbon dioxide present. In order to prevent

climate change, intensive efforts to reduce the use of hydrocarbon or petroleum based energy sources

have been called for, worldwide.

The use of bio-fuel is thought to be an effective way of reducing the volume of carbon dioxide

emitted into the atmosphere. The more bio-fuel is used, the more the reduction in carbon dioxide

emissions. Because of this benefit associated with the use of bio-fuel, a project based on the use of

bio-fuel could be regarded as an effective way of reducing carbon dioxide emissions and such a

project can therefore be considered a candidate project under the CDM (Clean Development

Mechanism).

16 Particulate Matter refers to those substances contained in the diesel gas emissions less than 2.5 microns in size and which are believed to be harmful to the respiratory system of human beings and able to cause a lung cancer if breathed in over a long period.

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2.3 Emerging Markets for Bio-fuel in Vietnam

Since 1999, the number of registered vehicles has been rapidly increasing at more than 10% per year.

Given that this trend is likely to continue till 2010, the total number of automobiles would increase

from 0.60 million, in 2000, to 1.6 million. Of this total, diesel driven vehicles could account for

around 70%. The number of motorcycles registered in 2000 was around 6.0 million. This would

increase to 15.5 million. Of the total number of motorcycles, almost 90% will be the 4-stroke type.

In parallel with the increase in vehicle numbers, fuel consumption can be expected to increase

rapidly. Table 2.4 shows projected fuel consumption, based on fuel type. It should be noted that all

fuel will need to be imported from abroad, mainly from Singapore, since no refinery is likely to be

commissioned in Vietnam before 2010.

Table2.4 Projection of Fuel Consumption in Vietnam (2010)

(Unit: Million t)

Year 2000 2010 Fuel in Total

Gasoline 1.48 3.80 Diesel 3.79 9.85 Total 5.27 13.65

Fuel for Transport Gasoline 1.48 3.84 Diesel 1.52 3.93 Total 3.00 7.77

Fuel for Road Transport Gasoline 1.48 3.84 Diesel 1.21 3.15 Total 2.69 6.98

Source: 1) Data for 2000 are from the Regional Workshop on Emission Reduction (RETA, ADB,

2000) 2) Projection for 2010 was done by the Study Team

The annual consumption of diesel in 2010 is predicted to be 9.85 million t. However, the amount of

diesel for transport use is predicted to be approximately 4.0 million t or 5.3 million KL per year.

Given that the benefits of bio-fuel are recognized by both its users and by the government, the

growers of the raw materials used in the production of bio-fuel would have a significant new market

for their products. The size and value of this new market can be readily calculated. Table 2.5 shows

the potential size and value of the bio-diesel market for coconut farmers in Vietnam.

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Table 2.5 Potential Market Size for Bio-diesel in Vietnam (2010)

Blending Ratio Unit 2% 5% 10%

Annual Diesel Consumption*1 1000 KL 5,360 5,360 5,360 Annual Bio-diesel Consumption 1000 KL 107 268 536 Value of Diesel Fuel*2 VND/L 4,800 4,800 4,800 Value of Bio-diesel*3 VND/L 5,600 5,600 5,600 Annual Output of Bio-diesel VND Billion 600 150 300 Annual Output of Bio-diesel*4 US$ Million 39 97 194 Source: Study Team Note: 1) Annual diesel consumption for automobiles is estimated as volume per year in 2010. 2) Value of diesel fuel is VND 4,800 per L, as of November 2004. However, this value is the subsidized

pump price. The actual pump price of diesel is estimated to be VND 5,600 per L. 3) Value of bio-diesel fuel is assumed to be the same as the actual price of diesel without any subsidy,

which can be analyzed based on the traded price of diesel in Singapore (Mean Platts of Singapore or MOPS)

4) The exchange rate between VND and US$ applied is VND 15,600, as of November 2004. The amount shown in US$ can be considered as the foreign exchange saved by not having to import petroleum products from abroad.

The more fuel consumption rises, the more bio-diesel consumption will be subject to the acceptance

of the market and the establishment of proper production and distribution systems. If bio-fuel

development is promoted on a regional basis, in collaboration with ASEAN countries such as the

Philippines, Thailand, Malaysia, Indonesia, Vietnam, etc. where coconut or palm cultivation has long

been part of traditional agriculture, then the consumption of coconut or palm based bio-diesel will be

further enhanced and accelerated. Once the local market and production systems have been

established, then Japan and/or China could also be considered as large potential markets for bio-fuel

produced in Asia.

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91

TECHNICAL PAPER - 3

Japanese Experience of Rural Industrial Development

3.1 General

The possibility of industrialization based on coconut cultivation has been based on the experience of

the modernization and development of the starch industry in Japan.

3.2 Starch Industry

Potatoes and sweet potatoes have long been cultivated by farmers aiming at self-sufficiency and as a

way of supplementing rice production. When the Meiji Government started the process of rapid

industrialization, these crops were considered important raw materials in the promotion of both cash

crops and rural industrialization. The commercial production of starch was industrialized and formed

the foundation for the development of light industry which, in turn, led to the start of the food

processing industry in Japan. The industrialization of Japan was strongly driven by the expansion of

domestic markets, the development of trade systems, the establishment of a settlement system, and

legalization. The tentative fixed sale price system was established to promote industrialization by

guaranteeing a constant income for farmers and producers and making available the necessary

finance, when needed. Collaboration between commerce, industry and administration, especially

with regard to the development of a banking system, created a system which could guarantee the

trade between farmers, producers and industrialists. This system enabled the starch industry to

develop rapidly and modernize on a long-term basis.

3.3 Applicability of the Japanese Experience to Vietnam

Starch, which was a new addition to the traditional agricultural system of the time, gave a strong

stimulus to farming and industrialization in rural areas. As the Japanese diet has changed from a

traditional to a somewhat more European style, the consumption of both starch and sugar has grown

rapidly. Now, after 100 years, the starch industry is producing a variety of valuable and important

industrial products widely used throughout the food processing, pharmaceutical, animal food and

other industries. For instance, the instant foods which are currently so common in the marketplace,

cannot be produced without industrially processed starch.

The same process used to expand the various uses of starch for diverse industries in Japan can be

adopted to expand the use of coconut in Vietnam.

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Appendices

Appendix-1 Itinerary of the Field Study Appendix-2 List of Institutions and Attendants Appendix-3 Experiment Report on Coco-diesel Appendix-4 Emission Trade Appendix-5 Kyoto Protocol Appendix-6 Coconut Planted Areas and Output by Province Appendix-7 Terms of Reference for Consulting Services

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95

Appendix-1

Itinerary of the Field Survey

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97

Appendix-1

Itinerary of the Field Study

The field study was carried out in three separate periods, as follows: 1. First Field Study: 12th August – 19th August 2004 as per Itinerary-1 2. Second Field Study: 20th September – 1st October 2004 as per Itinerary-2 3. Third Field Study: 22nd October – 4th November 2004 as per Itinerary-3

Itinerary-1

Day and Time Activity 12 August, Thu

1530 Arrival of Study Team in Hanoi by VN955 1700 Study team internal meeting at Almec Hanoi Office

13 August, Fri. 0800 Dr. Nguyen Thang Long, Deputy Director General, MOI, Directorate for

Provincial Industry 1000 Mr. Phan Huy Thong, Department of Agriculture, MARD 1400 Mr. Vu Cong Lang, Head of International Cooperation and Project Management

Division, National Institute for Agricultural Planning and Projection (NIAPP) 14 August, Sat. Transfer to Ho Chi Minh City, collation of data and information 15 August, Sun.

0700 Mr. Do Van Cong, Head, Division of Agricultural Technique, Department of Agriculture & Rural Development (DARD)

1800 Mr. Nguyen Hai Chau, Vice Director, Department of Industry (DOI) 16 August, Mon

0800 Mr. Nguyen Trung Phong, Director, MOI, Oil Plant Institute of Vietnam (OPI) 1000 Mrs. Nguyen Ai Nhan, Deputy Manager, VOCARIMEX

17 August, Tue. 0930 Leave Ho Chi Minh City for Da Nang 1100 Mr. Truong Hao, Vice Director, Da Nang Investment Promotion Center (IPC) 1300 Mr. Dang Phi Dung, Senior Officer, DARD, Da Nang 1430 Mr. Nguyen Dinh Phuc, Deputy Director, DOI, Industrial Department

18 August, Wed. 0900 Mr. Nguyen Thanh Quang, Vice Director, DARD, Quang Nam 1100 Mr. Luu Van Lao, External Affairs, on behalf of Quang Nam's PC

Mr. Phan Duc Nhan, Deputy Director, Management Unit of Chu Lai Open-economic Zone, Quang Nam PC Mr. Dinh Van Thu, Director, Industry Department, Quang Nam Province

1400 Mr. Nguyen Duc Hoai, Vice Director, DOI, Quang Ngai, Industrial Department 1600 Eng. Dao Minh Huong, Vice Director, DARD, Quang Ngai Province

19 August, Thu. 0855 Leave Da Nang for Hanoi 1100 Dr. Nguyen Trang Long, Deputy Director General, MOI, Directorate for

Provincial Industry 1400 MARD, Agriculture Department

20 August, Fri. 0730 Arrival at Narita

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Itinerary-2 20 September, Mon

Morning Leave Hanoi for Nha Trang Transfer from Nha Trang to Tuy Hoa, Phu Yen

14:00 Mr. Dao Tan Cam, Director, DOI, Phu Yen Mr. Pham Minh Thong, Expert, Chemist, Div. of Industrial Technique & Safety, DOI

21 September, Tue. 8:00 Mr. Nguyen Chi Hien, Director, DPI, Phu Yen

Mr. Vo Sau, Head, Division of Social-Economy Affairs, DPI Mr. Tuan, Head, Div. of Agriculture, Representative of DARD, Phu Yen Mr. Pham Minh Thong, Div. of Industrial Technique & Safety, DOI

14:00

18:00

Mr. Tuan, Head, Div. of Agriculture, Representative of DARD, Phu Yen Mr. Nguyen Duyen, Head, Division of Agro-Processing & Rural Industry Transfer from Phu Yen to Binh Dinh

22 September, Wed. 14:00

Mr. Le Van Tam, Director, DPI, Binh Dinh Ms. Thuy, Deputy Head, Division of Planning, DPI

23 September, Thu. 7:00 Mr. Nguyen Van Thien, Vice Chairman of Binh Dinh Provincial PC

Mr. Mr. Tran Ky Quang, Secretary of Binh Dinh PC Office Mr. Bui Quoc Hong, Deputy Chief, Provincial PC Office

8:00 Mr. Nguyen Kim Phuong, Director, DOI, Binh Dinh Mr. Vo Hong Hai Division of Processing, DOI

10:00 Mr. Nguyen Nhat Truong, Director, Phuoc An Processing Co. Ltd, Tuy Phuoc, Binh Dinh

14:00 16:00

Mr. Ho Ngoc Hung, Vice Director, DARD, Binh Dinh Mr. Nguyen Duc Ho, Coconut farmer, An Kim area, Phu Cat District

24 September, Fri. Morning Travel to Cam Ranh Town, Nha Trang City

Group 1 Coconut Holder, Bin Dinh 25 September, Sat. Sorting out data and information 26 September, Sun.

Morning Travel from Nha Trang to Ho Chi Minh City Afternoon Contact with Mr. Nguyen Trung Phong, Director of OPI in HCMC

27 September, Mon. Attending workshop for “Developing Sustainable Coconut-Based Income

Generating Technologies in Poor Rural Community” by Asia Pacific Coconut Growers Association in HCM City.

28 September, Tue. Attending the above workshop Mrs. Ngo thi Lam Giang, Vice Director, OPI.

Mr. Vo Van Long, Head, Dept. of Planning, OPI 29 September, Wed. Travel from Ho Chi Minh City to Ben Tre Province

14:00 Mr. Do Van Cong, Head, Div. of Agricultural Technique, DARD, Ben Tre 30 September, Thu.

8:00 Mr. Nguyen Hai Chau, Vice Director, DOI, Ben Tre 14:00 Mr. Cu Van Thanh, Director, Luong Quoi Coconut Oil Processing Co. Ltd.

Giong Trom District, Ben Tre. 1 October, Fri. Travel from Ho Chi Minh City to Hanoi

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ITINERARY-3

22 October, Fri. Travel from Tokyo to Hanoi 23 October, Sat.

9.00 Study Team internal meeting at ALMEC Hanoi Office 24 October, Sun Sorting previously collected data and information 25 October, Mon.

9:00 Dr. Nguyen Thang Long, Deputy Director General, Directorate for Provincial Industry, MOI Mr. Pham Thanh Tung, Head, Division for Small & Craft Industries, Directorate for Provincial Industry, MOI

15:00 Dr. Dang Tung, Director, Department of Science and Technology (DOST), MOI Dr. Pham Thu Giang, DOST, MOI Dr. Nguyen Quang Thao, Head and Expert, Biological Technology Division

26 October, Tues. Morning Travel from Hanoi to Nha Trang Airport

Afternoon Travel from Nha Trang Airport to Binh Dinh 27 October, Wed.

14.00 Mr. Ho Ngoc Hung, Vice Director, DARD. 16.00 Visiting coconut area at An Kim area, Phu Cat District of Binh Dinh

28 October, Thur. 8:00 Mr. Nguyen Kim Phuong, Director, DOI.

Mr. Vo Hong Hai, Division of Processing, DOI Mr. Hung, Economic Division, DOI

14:00 Mr. Nguyen Nhat Truong, Director, Phuoc An Processing Co. Ltd 16:00 Mr. Le Van Tam, Director, Director of Department of Planning and Investment

(DPI) of Binh Dinh Ms. Thuy, Deputy Head, Division of Planning, DPI

29 October, Fri. 8:30 Mr. Nguyen Van Thien, Vice Chairman, Peoples Committee of Binh Dinh

Mr. Nguyen Kim Phuong, Director, DOI Mr. Ho Ngoc Hung, Vice Director, DARD

Afternoon Travel to Nha Trang 30 October, Sat.

Morning: Flight to Hanoi from Nha Trang Airport 14:00 Study Team internal meeting on the material to present at MOI

31 October, Sun Preparation of the Report

1 November, Mon. Morning Preparation of Papers for the workshop at MOI

14:00 Meeting at MOI with three Departments of MOI: - Dr. Nguyen Gia De, Deputy Director, DOST, MOI - Mr. Nguyen Phu Cuong, DOST, MOI, in charge of the Program on Renewable Energy Development.

- Mr. Nguyen Xuan Dinh, Deputy Director, Oil & Gas Sector, Department of Energy & Petroleum, MOI

- Mr. Nguyen Tien Dung, Expert, Dept. of Energy & Petroleum, MOI. - Mr. Pham Thanh Tung, Head, Division of Small & Craft Industry, Representative of the Directorate for Provincial Industry, MOI.

23:00 Leave Hanoi for Tokyo by VN 954 2 November, Tues. Arrival at Narita, Tokyo, Japan

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101

Appendix-2

List of Institutions and Attendants

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103

Appendix-2 List of Institutions and Attendants

Ministry of Industry (MOI) Dr. Nguyen Thang Long Mr. Pham Thanh Tung

Deputy Director General, Directorate for Provincial Industry (DPI) Head, Division of Small & Craft Industry, (DPI), MOI.

Dr. Dang Tung Dr. Nguyen Gia De Mr. Nguyen Phu Cuong. Dr. Pham Thu Giang, Dr. Nguyen Quang Thao

Director, Department of Science and Technology (DOST), MOI Deputy Director, DOST, MOI DOST, MOI, in charge of the Program on Renewable Energy Dupl.’s. DOST, MOI Head &Expert, Biological Technology Division

Mr. Nguyen Xuan Dinh Mr. Nguyen Tien Dung

Vice Director, Oil & Gas Sector, Dept. of Energy & Petroleum, MOI Expert, Dept. of Energy & Petroleum, MOI

Mr. Nguyen Trung Phong Prof. Dr. Phan Lieu

Director, Oil Plants Institute (OPI), MOI. Former Director, OPI, MOI.

Mrs. Nguyen Ai Nhan Ms. Phan Phuoc Trang

Deputy Manager, National Co. for Vegetable Oils, Aromas, and Cosmetics (VOCARIMEX), MOI Department of Quality Control (VOCARIMEX), MOI.

Ministry of Agriculture & Rural Development (MARD) Mr. Phan Huy Thong Mr. Dung Mr. Vu Cong Lan Dr. Hoang Tuan Hiep

Vice Director, Department of Agriculture, MARD Expert, Farming Division, Department of Agriculture, MARD Head, Division of International Cooperation & Project Management, National Institute for Agricultural Planning & Projection (NIAPP) Expert, Agronomist, Dept. of Agro-Economic Zoning, (NIAPP)

Da Nang City Mr. Nguyen Dinh Phuc Mr. Le Thanh Ha Mr. Pham Kieu Da

Deputy Director, Department of Industry (DOI) Deputy Chief, Division of Planning and Investment. DOI. Director, DOI.

Mr. Dang Phi Dung Senior Officer, Head, Rural Industry Division, Department of Aquaculture- Agriculture-Forestry, Da Nang City.

Mr. Truong Hao Vice Director, Da Nang Investment Promotion Center IPC). Quang Nam Province Mr. Luu Van Lao Mr. Phan Duc Nhan

Foreign Affairs Officer, People's Committee of Quang Nam Province Deputy Director, Management Unit of Chu Lai Open-Economic Zone

Mr. Nguyen Thanh Quang Mr. Nguyen Thanh Dung

Vice Director, Dept. of Agriculture & Rural Development (DARD) Deputy Head, Division of Agriculture, DARD

Mr. Dinh Van Thu Director, Department of Industry (DOI) Quang Ngai Province Mr. Nguyen Duc Hoai Mr. Nguyen Tan Luc Mr. Nguyen Hoang

Vice Director, Department of Industry Small & Division of Craft Industry, DOI Technology Management Division

Mr. Dao Minh Huong Mr. Pham Van Tuan

Vice Director, Dept. of Agriculture & Rural Development (DARD) Deputy Head, Agriculture Division, DARD

Phu Yen Province Mr. Dao Tan Cam Mr.Pham Minh Thong Mr. Le Kim Chung

Director, Department of Industry (DOI) Expert, Chemist, Division of Industrial Technique and Safety, DOI Expert, Division of Planning, DOI

Mr. Nguyen Chi Hien Mr. Vo Sau

Director, Department of Planning & Investment (DPI) Head, Division of Socio-Economic Affairs, DPI.

Mr. Tuan Mr. Duyen Mr. Pham Minh Thong

Head, Agriculture Division. DARD Head, Div. of Agro-Product Processing & Rural Industry, DARD Expert, Div. of Industrial Technique and Safety, DOI Representative

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HCM City (at the Workshop on "Developing Sustainable Coconut-based income Generating Techniques in Poor Coconut Communes" in Ho Chi Minh City. Mrs. Chau Hue Cam Mrs. Ngo thi Lam Giang Mr. Vo Van Long

Vice Minister, Ministry of Industry, at the Workshop Vice Director, OPI Head, Department of Planning, OPI

Binh Dinh Province Mr. Nguyen Van Thien, Mr. Tran Ky Quang Mr. Bui Quoc Hong

Vice Chairman, People 's Committee of Binh Dinh Province Provincial PC Office Secretary Deputy Chief, Provincial PC Office

Mr. Le Van Tam Ms Thuy Mr. Duc

Director, Department of Planning & Investment (DPI) Deputy Head, Division of Planning, DPI Expert, Division of Industrial Project, DPI

Mr. Nguyen Kim Phuong Mr. Vo Hong Hai Mr. Hung

Director, Department of Industry, DOI Division of Processing, DOI Economic Division, DOI

Mr. Ho Ngoc Hung Vice Director, Dept. of Agriculture & Rural Development (DARD) Mr. Nguyen Nhat Truong Director, Phuoc An Processing Co. Ltd at Tuy Phuoc District Mr. Nguyen Duc Ho Mr. Pham Dinh Quy

Coconut householder, An Kim area, Phu Cat District Private entrepreneur, wood processing enterprise

Ben Tre Province Mr. Do Van Cong Head, Division of Agricultural Technique, Department of

Agriculture & Rural Development (DARD) Mr. Nguyen Hai Chau Vice Director, Department of Industry (DOI) Mr. Cu Van Thanh Mr. Cao Van Truong

Director, Luong Quoi Private Enterprise for Coconut Oil Processing, Giong Trom District. Manager of the Enterprise.

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Appendix-3

Experiment Report on Coco-diesel

106

107

108

109

110

111

112

113

114

115

116

117

Appendix-4

Emission Trade

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Appendix - 4

Emission Trade:

Emission Reductions can be planned and realized by producers of air pollution wishing to reduce

their emissions through any of the many options available to them. These options include installing

more advanced pollution control technology, switching to cleaner fuels, improving energy

efficiency and increasing renewable energy use. Pollution sources that decrease their emissions by

implementing such measures create emission reductions. Emission reductions from increased

energy efficiency and the use of renewable energy produce health and environmental benefits by

reducing sulfur dioxide, carbon dioxide, nitrogen oxides, lead, mercury and particulate matter

emissions.

Emission trading occurs when a source of air pollution reduces its emissions and then transfers

ownership of the emission reduction to another party. Markets for emission reductions can be

created by regulation or entered into voluntarily, as seen in the current market for greenhouse gases.

Producers of air pollution that reduce their emissions may receive credits for their reductions. These

are called Emission Reduction Credits (ERCs) and are used to reward those who take action to

reduce their pollutant emissions, thereby encouraging further pollution reduction actions. Credits for

emission reductions provide an incentive to find the most cost-effective way to reduce emissions

since, once an emission reduction credit is created, it can be sold on the open market.

A company can also offset its own emissions by causing a reduction or sequestration of emissions

outside its area of operations. Offsets were originally designed to allow growth and development in

areas that were not in compliance with an air quality standards without increasing pollution levels.

An offset program allows emission trading between a new or modified source of air pollution and an

existing source. Under this program, the new source is required to more than offset its emissions

with reductions by the existing source. In this way, net emissions actually decrease.

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121

Appendix-5

Kyoto Protocol

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Appendix-5

Kyoto Protocol

History: The concept of sustainable development dates back a long way but it was at the UN Conference on Human Environment (Stockholm, 1972) that the international community met for the first time to consider global environment and development needs. The 20th anniversary of Stockholm took place in 1992 in Rio de Janeiro. The UN Conference on Environment and Development, the "Earth Summit", agreed on Agenda 21 and the Rio Declaration. The Summit brought environment and development issues firmly into the public arena. Along with the Rio Declaration and Agenda 21 it led to agreement on two legally binding conventions: Biological Diversity and the Framework Convention on Climate Change (UNFCCC).

The Protocol: The Kyoto Protocol is a document signed by about 180 countries at Kyoto, Japan, in December 1997. The protocol commits 38 developed countries to reduce their emissions of Green House-effect Gases (GHGs) between 2008 and 2012 to levels that are 5.2 per cent below 1990 levels.

How greenhouse gases produced and what impact do they have on the environment? GHGs is a term a used for gases [carbon dioxide (CO2), methane (CH4), and nitrous oxide (N20), and long-lived industrial gases such as hydro fluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride (SF6) etc.] which are mainly generated as a result of burning fossil fuels like coal, petrol and diesel. While, the use of these fuels has helped industrialization enormously, it has caused a steady increase in levels of carbon rich gases and other pollutants. Scientists predict that higher levels of greenhouse gases will cause a significant warming of the earth by about one to five degrees Celsius. This could cause potentially disastrous changes in the environment like violent storms, expanding deserts and melting ice caps, causing sea levels to rise and engulf coastal regions. According to one estimate, global warming could cause the world about $5 trillion. Developing countries are expected to be the hardest hit.

Flexible Mechanism based on Emission Trading (JI and CDM) In particular, an international "emissions trading" regime will be established allowing industrialized countries to buy and sell emissions credits amongst themselves. They will also be able to acquire "emission reduction units" by financing certain kinds of projects in other developed countries through a mechanism known as Joint Implementation. In addition, a "Clean Development Mechanism" for promoting sustainable development will enable industrialized countries to finance emissions-reduction projects in developing countries and receive credit for doing so. The operational guidelines for these various schemes are being elaborated under a two-year Plan of Action that is to conclude at COP6. The Protocol encourages governments to cooperate with one another, improve energy efficiency, reform the energy and transportation sectors, promote renewable forms of energy, phase out inappropriate fiscal measures and market imperfections, limit methane emissions from waste management and energy systems, and protect forests and other carbon "sinks". The measurement of changes in net emissions (calculated as emissions minus removals of CO2) from forests is methodologically complex and still needs to be clarified.

Commitments: Under the Convention, both developed and developing countries agree to take measures to limit emissions and promote adaptation to future climate change impacts; submit information on their national climate change programs and inventories; promote technology transfer; cooperate on scientific and technical research; and promote public awareness, education, and training. The Protocol also reiterates the need to provide "new and additional" financial resources to meet the "agreed full costs" incurred by developing countries in carrying out these commitments.

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Appendix-6

Coconut Planted Areas and Output by Province

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Appendix-6

Planted Areas by Coconut by Province (in ha)

No. Province/cities Years 1996 1997 1998 1999 2000 2003

Whole Country 181,108 169,858 169,515 163,508 161,345 133,913 North 3,129 3,154 3,302 3,312 3,243 3,298 I Red river Delta 304 286 433 418 385 421

1 Ha Noi 6 7 7 6 6 2 Hai Phong 159 161 164 169 178 3 Ha Tay 20 10 10 4 Hai Duong 134 114 74 5 Ha Nam 12 17 17 17 17 6 Nam Dinh 30 32 32 39 36 7 Thai Binh 48 30 40 40 40 8 Ninh Binh 29 29 29

II. North East 52 52 31 35 39 9 Quang Ninh 52 52 31 35

III North West 3 3 3 2 2 2 10 Lai Chau 3 3 3 2 2

IV North Central Coast 2,822 2,813 2,814 2,861 2,821 2,836 11 Thanh Hoa 2,033 2,039 2,039 2,066 2,076 12 Nghe An 515 518 523 523 523 13 Phu Tho 18 25 24 14 Quang Binh 84 84 82 71 65 15 Quang Tri 31 16 Thua Tien Hue 172 172 170 145 133

Central 40,753 35,291 35,176 34,736 32,558 25,462 V South Central Coast 29,766 27,442 27,389 26,892 26,121 19,732

17 Da Nang 61 61 60 61 18 Quang Nam 939 870 826 798 744 2,853 19 Quang Ngai 6,620 6,625 6,598 6,420 6,380 11,464 20 Bin Dinh 13,205 13,240 13,256 13,033 13,033 21 Phu Yen 5,570 3,267 3,267 3,067 2,783 22 Khanh Hoa 3,432 3,379 3,381 3,514 3,120

VI Central Highlands 609 612 617 618 477 444 23 Kon Tum 60 60 60 60 53 24 Gia Lai 450 450 450 450 320 25 Dak Lak 99 102 107 108 104

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VII North East South 10,378 7,337 7,170 7,226 5,960 5,286

26 HCM city 4,275 1,684 1,518 1,400 1,200 27 Ninh Thuan 18 21 21 21 21 28 Binh Phuoc 162 141 142 119 126 29 Tay Ninh 1,850 1,930 1,950 2,497 2,502 30 Binh Duong 397 401 401 401 349 31 Dong Nai 1,705 1,615 1,588 1,328 693 32 Binh Thuan 1,650 1,203 1,208 1,170 777 33 Ba Ria-Vung Tau 321 342 342 290 292

137,226 131,313 131,037 125,460 125,544 105,153 VIII Mekong Delta 137,226 131,313 131,037 125,460 125,544 105,153

34 Long An 3,878 3,460 3,460 3,316 3,025 35 Dong Thap 2,428 1,839 1,823 1,154 964 36 An Giang 2,890 2,792 2,792 2,792 2,792 37 Tien Giang 7,998 7,998 7,998 10,377 10,377 38 Vinh Long 9,970 9,745 9,745 9,290 9,185 39 Ben Tre 32,919 30,479 30,629 32,364 37,758 35,020 40 Kien Giang 9000 9000 9000 8,289 8,240 41 Can Tho 11,494 11,440 11,292 10,995 10,562 42 Tra Vinh 13,605 12,418 12,418 11,018 10,630 43 Soc Trang 8,036 7,649 7,396 7,087 4,889 44 Bac Lieu 8,377 7,934 7,934 7,857 7,020 45 Ca Mau 26,631 26,559 26,550 20,921 20,102

Source: Statistics of Agriculture and Rural Development 1996-2000, Dept. of Planning and Projection, 2002, GSO, Statistical Yearbook 2003

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Appendix-6

Output of Coconut by Province (in t nut weight)

No. Province/cities Years 1996 1997 1998 1999 2000 2003 Whole Country 1,317,797 1,317,555 1,271,348 1,104,211 884,839 893,500 North 31,188 29,554 34,108 26,228 34,048 18,332 I Red river Delta 3,952 2,843 6,631 2,965 2,585 6,540

1 Ha Noi 112 80 121 50 50 2 Hai Phong 2,733 1,845 3,541 1,501 1,400 3 Ha Tay 298 100 100 4 Hai Duong 1,968 549 322 5 Ha Nam 100 110 101 95 83 6 Nam Dinh 173 176 224 214 218 7 Thai Binh 336 336 380 350 300 8 Ninh Binh 200 196 196 206 212

II. North East 517 517 282 290 338 9 Quang Ninh 517 517 282 290

III North West 21 21 21 6 6 9 10 Lai Chau 21 21 21 6 6

IV North Central Coast 27,215 26,173 26,939 22,975 31,167 11,445 11 Thanh Hoa 20,986 20,130 20,130 17,515 25,800 12 Nghe Anh 4,077 4,530 5,436 4,066 3,889 13 Ha Tinh 96 151 162 14 Quang Binh 526 259 285 264 264 15 Quang Tri 118 16 Thua Thien Hue 1,530 1,254 1,088 861 1,052

Central 246,051 243,092 222,559 225,675 187,487 193,792 V South Central Coast 142,463 152,079 155,344 165,049 139,817 124,272

17 Da Nang 1,017 350 353 340 18 Quang Nam 6,889 4,620 4,100 3,498 5,541 19 Quang Ngai 35,320 35,248 35,344 43,423 34,470 20 Binh Dinh 50,240 61,016 63,192 64,567 65,540 67,245 21 Phu Yen 31,900 39,758 39,758 27,950 24,335 25,500 22 Khan Hoa 18,114 10,420 12,600 25,258 9,591

VI Central Highlands 3,454 3,392 3,925 4,003 3,792 3,809 23 Kon Tum 40 40 40 85 180 24 Gia Lai 2,118 2,040 2,625 2,730 2,635 25 Dak Lak 1,296 1,312 1,260 1,188 977

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VII North East South 100,134 87,621 63,290 56,623 43,878 65,711

26 HCM city 47,820 14,514 15,000 15,003 10,503 27 Ninh Thuan 180 180 167 180 190 28 Binh Phuoc 1,177 801 1,379 736 750 29 Tay Ninh 21,250 41,962 15,600 17,693 19,355 30 Binh Duong 3,768 3,968 4,059 4,110 2,898 31 Dong Nai 12,914 12,873 14,000 9,182 3,668 32 Binh Thuan 9,900 11,458 11,200 8,756 5,592 33 Ba Ria-Vung Tau 3,125 1,865 1,865 963 922

1,040,558 1,044,909 1,014,668 852,308 663,304 681,376 VIII Mekong Delta 1,040,558 1,044,909 1,014,668 852,308 663,304 681,376

34 Long An 37,200 36,850 36,850 27,700 22,000 35 Dong Thap 19,900 18,690 19,400 5,804 3,506 36 An Giang 40,480 40,075 44,022 22,550 19,300 37 Tien Giang 42,781 40,781 40,781 77,296 42,296 38 Vinh Long 116,213 126,082 126,082 70,631 70,200 39 Ben Tre 212,520 200,930 205,025 258,304 231,657 221,000 40 Kien Giang 52,740 49,165 49,165 57,000 47,250 41 Can Tho 106,779 156,200 160,000 86,315 49,853 42 Tra Vinh 171,256 154,657 154,657 71,267 69,828 43 Soc Trang 67,338 33,070 32,502 37,131 21,727 44 Bac Lieu 23,126 38,184 38,184 23,315 19,401 45 Ca Mau 150,225 150,225 108,000 114,995 66,286

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Appendix-7

Terms of Reference for Consulting Services

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Study on Strategic Policy Formulation for

Rural Industrialization through the Use and Production of Bio-diesel

I. INTRODUCTION

A. Background of the Study

The economy of Vietnam has been making remarkable progress with an annual GDP

growth rate consistently above 7.0% over the past few years and its speed of development

is likely to accelerate even further in the future. However, the Government of Vietnam has

started addressing several strategic development issues aimed at realizing sustainable as

well as equitable economic development throughout the country. The issues addressed by

this Study, from among the current issues addressed by the Government of Vietnam, are as

follows:

l The widening economic disparity between regions;

l The widening economic gap between urban and rural areas;

l Lack of employment and income opportunities in rural areas;

l Eradication of poverty, especially in rural areas; and

l Degradation of air quality due to increased automobile gas emissions.

One of the measures than can be used to address these issues is rural industrialization

through the use and production of bio-fuel (biomass energy) made from coconut, since most

of the raw materials needed for bio-fuel are already grown in core rural areas and much land

is available in Vietnam for further expansion. The coconut has traditionally been widely

grown and cultivated in the Mekong Delta Region (125,000 ha) and the South Central

Coastal Region (32,000 ha).

Technical research and development on biomass energy, worldwide, has made remarkable

progress over the past 10 years, especially in the production and use of renewable

alternatives to diesel fuel (in most cases as Fatty Acid Methyl Esters or FAME). One of the

raw materials that bio-diesel can be produced from is coconut. However, most of the

coconut growers are small landholders belonging to the poorest segment of society and

face difficulties in improving their livelihood since the planting area and output of coconut

has been continuously decreasing.

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The Ministry of Industry (MOI), in collaboration with the Ministry of Agriculture and Rural

Development (MARD), has plans to revitalize coconut farming and create a new industry in

those rural areas, based on the use and production of bio-diesel made from coconut. The

aims of this rural industrialization program are to:

1. Create new markets for coconut, whose price has continuously dwindled or stagnated

over the past decade;

2. Increase income to coconut growers through the use of coconut as a raw material to

produce bio-diesel for use in diesel fuel;

3. Improve the air quality, especially in large cities where the ambient air has been

contaminated by increased diesel gas emissions (with increased levels of Particulate

Matter or PM); and

4. Reduce the levels of carbon dioxide (CO2) emission from mobile sources in order to

counter climate change due to increased greenhouse gas effects.

ASEAN countries, of which Vietnam is a member, have carried out extensive research and

development over the past 5 years into the use of renewable bio-fuels based on either

coconut or palm oil, especially in the Philippines, Malaysia and Thailand. These two

products have been found to produce bio-diesel with a higher performance than that made

from rapeseed, soy-bean etc. Despite having a considerable area in coconut cultivation,

Vietnam lags behind these frontrunners.

B. Rationale of the Study to Promote the Use of Bio-diesel

Vietnam’s coconut planting area totals around 160,000 ha. However, this resource has not

been used as a basis for rural industrialization because its market is small and unstable. If

the diesel fuel made from coconut is blended with diesel fuel at a rate of 5%, and assuming

that the total annual consumption of diesel fuel for transport use in 2010 is 4.5 million KL,

then the estimated size of the bio-diesel market in 2010 will be 268,000 KL, or around

US$78 million per year. As the number of coconut farmers expected to produce coconut for

bio-diesel production is estimated at around 7.0 million, the expected annual income from

the sale of coconut is VND 5 million (US$320) per year, which is around twice the average

annual income generated from the cultivation of coconut at present.

The coconut tree is called the “Tree of Life” because it can be used for various purposes

such as edible oil, lighting oil, soap, detergent, desiccated nut, nata-de-coco, coconut milk,

coconut virgin oil, copra meal, industrial alcohol, etc. (all of which are made from coconut

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crude oil). Activated charcoal is made from coconut shell. Rope, mat, geo-textile, etc. is

made from husk. Handicrafts are made from shell and stem and construction materials are

made from leaves and stems. Therefore, if a stable and constant market is created by the

production of bio-diesel based on coconut crude oil or copra then numerous other

by-products produced by the coconut processing plant can also be incorporated in an

integrated manner. The establishment of these industries in rural areas where coconut is

grown intensively would create a considerable number of job and income generation

opportunities.

Around 100-144 coconut trees are usually planted in one hectare of land. This means that

enough space exists between trees to conduct inter-cropping. In this way, coconut farmers

would have various opportunities to diversify and develop new income sources helping

ensure a continuous and stable income, especially when the farmer enters into a contract

with the coconut oil or bio-diesel producer for the supply of raw material.

The MOI, therefore, intends to implement this Study in order to formulate a strategic

development master plan to realize rural industrial development through the use and

production of bio-diesel made from coconut.

II. ISSUES

A. General

The Study envisages formulating a strategy to introduce and promote the use of bio-diesel

at a national level as an important tool to improve the environment in urban areas and to

improve living standards in rural areas through increased production and sale of oil palm,

palm kernels and coconut.

The issues identified in order to formulate such a development strategy are as follows:

1. Technical Issues (fuel): Specifications, optimum processing method, etc. 2. Technical Issues (growing): Improved quality and yield of raw material, etc. 3. Management Issues: Standardization, regulation, inspection system, etc. 4. Commercial Issues (fuel): Pricing, subsidy, tax exemption, etc. 5. Commercial Issues (material): Stabilized raw material price, buffer mechanism, etc.

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B. Improved Yield of Raw Materials In order to attain a sustainable supply of raw material at an appropriate price the yield of raw

materials must remain constant or be increased. Research and development into improved,

disease resistant, high yield varieties of coconut has to be carried out effectively and the

resultant farming techniques have to be made available to all growers.

C. Distribution of Product Bio-diesel fuel is a new product being introduced into the automobile petroleum products

market. Unlike existing petroleum products, there is no history or experience with bio-diesel

distribution systems. It may not be wise to distribute bio-diesel fuel through the established

distribution system for automobile petroleum products, at first, because the initial volume of

bio-diesel produced will be small and only increased once the use of bio-diesel is commonly

accepted by its users in the marketplace. In order to begin to create a new market for

bio-diesel in Vietnam, it will first be necessary to establish appropriate standards for

bio-diesel production and use. Secondly, regulations concerning the use of bio-diesel should

be established and inspection systems for bio-diesel distribution should be put in place. Until

those systems are completed, as has been done for other automotive petroleum products in

the marketplace, the effective distribution of bio-diesel cannot commence.

D. Pricing of the Products One of the tools that can be used to stabilize the farm gate price of coconut is the contract

cultivation method. Using this method, the bio-diesel producer will obtain a constant supply

of raw material at a fixed price. In return, growers/farmers receive a continuous income free

of international or domestic market fluctuations in the price of coconut oil. The other tool that

will be used to stabilize the farm gate price of raw materials is the development of

large-scale coconut plantations owned, operated and managed by government entities, able

to control any fluctuations in price of these international commodities. However, the extent to

which such plantations function as a buffer may be open to question since the pricing

mechanism cannot be established by the planner, alone, without consensus among all the

project stakeholders, including central government, local government, raw material

growers/farmers, bio-diesel producers, distributors, etc.

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E. Marketing of the Bio-diesel The technical and management issues relating to the production and distribution of

bio-diesel fuel should be solved prior to the commencement of marketing. Unless the

systems of production and marketing are completed in unison it would be quite risky to

commence the distribution of bio-diesel fuel through the established distribution chain for

automotive fossil diesel fuel, since the volume of supply cannot be guaranteed. The

marketing of bio-diesel fuel should be carefully studied, taking into account both the

scheduled production volume of raw material and the planned processing capacity of

bio-diesel fuel. Since the assured supply of bio-diesel will be limited, at first, marketing

should start with organized users of bio-diesel fuel (e.g. government vehicles, public bus

systems, railway corporations, domestic shipping companies, inland water transport

companies, city cleaning units, armed forces, etc.) A long-term purchase/sale agreement

between the bio-diesel producer and bio-diesel user might then be concluded in order to

open up the bio-diesel fuel market in Vietnam.

III. THE STRATEGIC POLICY FORMULATION STUDY

A. Purpose and Output

The Study will assist the Government to formulate policy on the introduction of bio-diesel

fuel into the market so as to stimulate the rural economy, improve the living standards of the

rural populace, improve the air quality in large cities and thereby benefit the health of the

urban populace. Moreover, a rural industrialization plan will be prepared so as to assist the

rural economy by stimulating sustainable demand for products being produced exclusively

for the program through the mechanism of provincial, regional and international

collaboration.

The Study entails (i) preparing a strategic policy formulated to introduce and promote the

use of bio-diesel fuel (ii) formulating a model project comprising a bio-diesel processing

plant and (iii) establishing a model, integrated system for the production of bio-diesel fuel by

the plant operator and growers of palm and coconut.

B. Methodology and Key Activities The Study will be conducted in three phases. First, the optimum processing method for CME

will be assessed and the best possible technical performance attained in terms of fuel

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consumption, reduction of PM and ignition performance (Cetane Index). Determining the

best ratio for blending CME with diesel is part of Phase 1. Phase 2 is the formulation of a

development strategy based on the assessment of current fuel consumption, air quality,

planting areas, income levels of growers/farmers, relevant development programs on

coconut, etc. Phase 3 is the formulation and implementation of a model project involving the

design of a bio-diesel production plant, an integrated coconut processing plant and the

adoption of contract cultivation between bio-diesel producers and raw material producers.

The possible use of the CDM funding mechanism for the development of a coconut-based

bio-diesel industry should also be carefully studied.

C. Implementation Plan The Study will require a total of about 50 person-months of consulting services. The

following areas of expertise will be needed:

1. Team Leader (Expert on project management)

2. Bio-fuel Expert

3. Transport Management Expert

4. Coconut Expert

5. Agronomist

6. Marketing Expert

7. Agricultural Organization Expert

8. Regional Development Planner

9. Rural Industrialization Planner

10. Bio-fuel Processing Expert (Esterification Process)

11. Mechanical Engineer

12. Civil Engineer

13. Economic and Financial Analysis Expert

14. Institutional Expert

15. Others

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IV. FUNDING MECHANISM

A. Potential Source of Funding

The implementation of a rural industrialization project based on the use and production of

bio-diesel made from coconut may require government funding in the initial stages and

private sector participation will be introduced after the model project is certified as viable.

The model project may be implemented by ODA or other appropriate means. The expansion

of coconut cultivation in the model project may require a soft loan or institutionalized loan

supported by ODA .

The Study to assist the Government may be conducted as part of a technical collaboration

program between donor countries and Vietnam. The total cost of the Study, comprising 50

person-months, is estimated at around US$1.2 million.

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Outline Terms of Reference for Consultants

A. Phase-1: Experimentation with Bio-diesel Fuel

Phase-1 will determine the specifications of the bio-fuel to be made from coconut oil.

Adequate experimental testing and laboratory analysis shall be carried out. Performance

tests will be carried out on the bio-fuel produced to verify that the locally made CME is

acceptable for automobile use in Vietnam. Chassis and dynamo tests shall be conducted to

measure the reduction obtained in the levels of PM and other GHGs.

B. Phase-2: Formulation of a Development Strategy Phase-2 will prepare a development strategy for the use and promotion of bio-diesel fuel in

an integrated manner, comprising the policy direction, development measures, development

mechanism, and formulating a model project. The following tasks will be carried out:

(1) With a focus on the project’s direction and objectives, collect and update data and

information concerning oil palm and coconut production, oil processing, distribution,

trade, income level of farmers, geographical distribution, etc.

(2) Discuss and review with the Government and stakeholders: (a) transport development,

(b) poverty reduction issues, (c) status of policies and policy reforms, (d) creation of a

price stabilization mechanism, (e) management and organizational plans, etc.

(3) Analyze air quality in major cities

(4) Conduct workshops and seminars for the dissemination of the bio-diesel program

(5) Build-up the consensus among all project stakeholders

(6) Prioritize the development program

(7) Prepare a model development plan

(8) Prepare recommendations

C. Phase-3: Formulation of the Model Project Phase-3 will implement the model project to verify the operation and management of the

bio-diesel development program formulated during the preceding phase of the study. The

following tasks will be carried out:

(1) Carry out technical plans and design the model plant

(2) Carry out technical, economic and financial appraisals of the model project

(3) Disseminate the bio-diesel and rural industrialization plan based on the expanded use of

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bio-diesel fuel in the future.

(4) Estimate costs for capital investment, operation and management

(5) Prepare the financial plan for funding the operation of the model plant

V. SCHEDULE

Duration of the Study: 21 months

Work Schedule:

Q1 Q2 Q3 Q4 Test of bio-fuel Strategy Formulation Model Plan

VI. COST ESTIMATES

------------------------------------------------------------------------------------------------------- Consultants 50 MM US$ 1,000,000 (Remuneration) International Travel US$ 30,000 Reports and Communication US$ 20,000 Testing of Performance US$ 50,000 Workshop US$ 20,000 Survey and Data Collection US$ 100,000 (Farming, poverty level,) Miscellaneous US$ 50,000 ================================================================== Total US$1,270,000 ==================================================================

This work was subsidized by the Japan Keirin Association through

its Promotion funds from KEIRIN RACE.